year end accounts - reporting standards for foreign currency accounts year end accounts - reporting standards for foreign currency accounts
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  1. #1

    Nervous Newbie


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    Default year end accounts - reporting standards for foreign currency accounts

    Hi there,

    I am a small UK based business and last year I had some dealings in euros ( basics, invoices + payments)

    At the beginning of the year I had a balance of X then throughout the year I had invoices and payments.

    I am unsure which date I need to use to re-evaluate the euros figures back to the reporting currency ie GBP.

    1 - Do I need to re-evaluate my opening balance ? if so, with the FX rate as of 1st of April ?
    2- Invoices and payments throughout the year ? Spot rate of the day the transaction took place ?
    3- Closing balance ? Statement date ( my statement for example was issued on the 27th feb) or closing year end balance 31st March ?

    And finally, what is the appropriate manner to calculate the fx loss or gain ?

    Many thanks for your help !

  2. #2

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    In signing off my accounts, I insist on understanding / reconciling every line -- except the foreign currency gain/loss line. On that one, I take my accountant's word for it.

    I can tell you basically what he's done, as I understand it, but don't trust internet advice, I am not an accountant. My foreign currency accounts are valued at the beginning and end of the year using the spot rate for buying GBP. All transactions are valued as of the tax point date for the transaction (invoice date, typically), again using the spot rate for buying GBP.

    A. You have three sources of foreign currency, all with different starting rates:
    1. Beginning year balance -- start of year forex rate applies.
    2. Revenue -- tax point / invoice date forex rate applies.
    3. Converted from GBP -- conversion rate applies.

    B. You have three end points for foreign currency, all with different ending rates:
    1. Ending year balance -- end of year rate applies.
    2. Foreign expenses -- tax point (invoice date or actual purchase date applies).
    3. Converted to GBP -- conversion rate applies.

    If I remember correctly, he determines the GBP basis by multiplying the amounts in A (1, each invoice in 2, each conversion in 3) by the effective rates for each amount. Then, he does the same for B. The difference is the currency gain/loss.

    Why wouldn't you pay an accountant to do this? I can understand wanting to do it yourself if everything is simple, but once it starts to get complicated, why not pay an accountant and spend your time making money?

  3. #3

    Nervous Newbie


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    Thank you for the feedback.

    Oh.. I have an accountant, a major accountancy company for that matter, they calculated a gain on Fx and I calculated a loss, and they are unwilling to provide me with their workings.

    From my findings on the HMRC website, I am fairly sure of my calculations therefore I am at loss to understand how they can come up with a gain and the difference is pretty substantial !

  4. #4

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    Quote Originally Posted by rowingf35 View Post
    Thank you for the feedback.

    Oh.. I have an accountant, a major accountancy company for that matter, they calculated a gain on Fx and I calculated a loss, and they are unwilling to provide me with their workings.

    From my findings on the HMRC website, I am fairly sure of my calculations therefore I am at loss to understand how they can come up with a gain and the difference is pretty substantial !
    A gain/loss is the difference accrued between the amount invoiced at a nominal rate (e.g. close) on the tax point/invoice date and the actual buy rate on the exchange date. There may be losses/gains carried over between tax years. Separately, you may have bank charges in a foreign currency (to which the date levied would apply for a currency conversion). They may be realizing a gain by subtracting that gain from the business expenses (i.e. negative sign) in the accounts.

    They must provide you with their workings. If you cannot satisfy yourself that they have taken reasonable care and that your accounts are accurate to the best of your knowledge, you cannot sign-off.

  5. #5

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    Quote Originally Posted by rowingf35 View Post
    they are unwilling to provide me with their workings.
    Fire them then.
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  6. #6

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    Quote Originally Posted by TheFaQQer View Post
    Fire them then.
    My thoughts exactly. You are just dealing with one currency, you said. How many euro transactions do you have in a year, anyway? Mine is more complicated because of more than one currency, but even so, if I asked, they'd give me a spreadsheet.

    I expect losses, because the tax point rate is based on interbank rate and the actual buy rate always has the currency dealer's margin included. So rates have to move my way at least 1%, on average, between transactions for there to be a gain. I always expect a loss. If you are going to accept contracts in euros, and the exchange rate risk that comes with it, you need to have enough margin in your rates to cover losses.

  7. #7

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    I am all good from the operational stand point, but I could not figure out my accountant calculations. We are talking about 5 invoices & 5 payments, (paid roughly a week after issuance, so I do not have a major variation in valuation), I don't know how they valued the brought forward euro account bank balance and the ending balance.
    For example, the accountant took the closing date of the bank statement for the valuation of the ending balance. ( I did not have any movement in my bank account after that date and she had the following statement to prove it). I do not know what is the standard methodology, closing date of last bank statement or 31st of March ?

  8. #8

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    I'm not an accountant, so I could have this wrong.

    But I'm pretty sure if I tried to tell my accountant that we should use my final bank statement in my accounting year, and ignore any transactions that took place after that, he'd laugh at me, and say, "You are not an accountant, I am, we don't do it that way. We consider everything that happened in your tax year whether or not the last bank statement shows it."

    And if I tried to claim that my foreign accounts should be evaluated based on the exchange rate as of the date of the final statement in the tax year, rather than the exchange rate as of the end date of the tax year, I'm pretty sure he'd laugh at me again.

    It should be the final date of the tax year.

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