All is also clearly explained at Foreign Exchange Gain/Loss - Overview, Recording, Example Especially review the sections related to realized and unrealized forex gains and losses. @Abeiku gave a clear example how this works in practice with Manager.
There is something a bit not quite right here, I think but I could be wrong
I setup a new business - Base currency RWF
The exchange rate on 1st March is 1 Eur = 1136 RWF or 1 RWF = 0.00088 Eur
I setup a Euro bank account and a Euro loan account
On 1st March I receive a loan of € 1,000 which is posted to the loan account so that the cash in the bank is offset by the loan liability
The balance sheet looks like this with the 1,000 Eur in the account, valued at 1,1136,363.34 (rounding problem, to be ignored)
On 30th March I repay the loan but the exchange rate has now changed to 1 Eur = 1,111 RWF or 1 RWF = 0.00090 Eur ie the Euro has weakened and the RWF has strengthened
The new Balance sheet now shows that the Euro account has been cleared but the loan liability still has a balance of 25,252.53 RWF because when the RWF strengthened, we only needed 1,111,111.11 to pay off the loan balance
However, as the loan is now cleared the FOREX gains/losses account now has a negative balance of 25,252.53 RWF which is carried to the retained earnings account as a loss
The P & L for the period shows the same FOREX loss
To continue, if I transfer the loan amount from the Euro acount to the RWF bank account on 1st March and then back again on 30th March, the FOREX loss disappears, and I am left with 25,252.53 in the RWF bank account and a loan liability of 25,252.53
My initial reaction is that Manager deals with Forex gains/losses on sales & purchase invoices correctly, but is missing something on pure financial transactions such as loan
In this case, it is necessary to use a journal entry to transfer the 25,252.53 from the loan account to a Realised Forex Gain/Loss account
@Joe91 am I right to understand that you are saying that my initial post was not totally wrong?
I guess you created the account Realised Forez gain/loss yourself? I had thought of doing this too, but I had assumed Manager would do this automatically. Otherwise it would take a lot of time to post all these transactions in forex, which we have many of during the year.
How did you create the loan account? Did you use a special account and set the currency also to EURO?
I don’t think I fully understand your post, but as I posted above, in our case the overview of forex gain/loss includes Account Payables too, and Employee Clearing Account. My point is that it should include also other Accounts with forex, such as loans in forex.
Yes, I created the Realised Forex gains/losses myself - as I said I believe that realised Forex gains/losses assocaited with Accounts Payable and Receivable are handled automatically
I created a standard Lliability account - never though of creating a Special account valued in Euros - I will try that
I just created an account from the Chart of account. There is no option to choose the Currency it seems:
What is a SPECIAL account? Pardon my ignorance…
@mauroskov Kindly check the guide for Special accounts Use special accounts | Manager
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Non-Monetary accounts use historical rates. The New Exchange rate was used in determining the RWF amount hitting the loan account to settle it. There will be an exchange gain or loss since the Euro has weakened and you must get the equivalent Euro to settle the RWF in the liability account which is RWF 1,1136,363.34 (because the balance of the loan account will always use historical rates). Once you enter foreign currency funds into a regular account (normal accounts, fixed assets, base currency bank accounts etc), the balance of that account which is in the base currency will not change due to exchange rate fluctuations.
Because the RWF had strengthened on March 30th, you needed a little more Euros to settle the liability, which totalled 1,1136,363.34 (unchanged), so technically, you have not completed the loan repayment.
The loan was in euros - so it was cleared - the balance of 25,252 represents the Realised Foreign Exchange Gain - basically the business borrowed 1,136,363 and only had to pay back 1,111,111 because the RWF strengthened v Euro.
Had it weakened, they would have made a Forex loss
A preliminary trial using a Special Account to hold the Loan Liability in euros does not help at all
In what way?
It is not about it being good or bad. If you record a foreign currency liability in the foreign currency, you get the advantage of tracking the gains and losses anytime the exchange rate changes. If you don’t do that, you will only notice the gain or loss when it is time to pay. The bank statement will show you that.
In your example, it is as if your lenders were collecting RWF equivalent on the day of settlement. (because you recorded the liability in RWF in the first place).
When I used a Special Account labelled in Euros to hold the loan liability, no Forex Gain/Loss was calculated at all
The business’s base currency is RWF - you have to record the initial loan on the Balance Sheet in RWF
It would have shown if you didn’t have the same amount as an asset (cash at bank). They knock off each other.
But when I repayed the loan, it didn’t show up either. Obviously, if the loan remains in the Euro bank account and Loan Account, then there is no Forex Gain/Loss as the change in value of one will offset the change in the other
Yes