I am sure this is overly simple, but wanted to check I was going to do this correctly.
We have made a pre-payment for some goods that will not be delivered to us until July of this year and havng posted this payment there is a sizeable exchange gain created in our books.
Issue is that our year-end in 31.5.11, so I need to move the exchange gain from 20.5.11 forward to beyond 1.6.11 to put this gain in the same year as the purchase/sale of these goods.
Question is simply which do I use Accruals, or Prepayments to move the gain forward?
wish I had got back in time to see your answer before you deleted it... Right, you can't officially be a Guru now till 501 posts (lol).
Hi Jeremy,
Gains and losses on foreign currency transactions are entered seperately in the income statement (P&L) rather than being subsumed in other accruels and prepayments.
I'm confused. Have you bought the books (already paid for them) or entered into a forwards agreement to buy the books at a set price?
Assuming from the question you mean that you have entered into an agreement to buy the goods at a set price and you are "expecting" to make a gain on the exchange rate the double entries that you are looking at for this are (example uses cost of purchase of $100 and exchange rates on 20/05/11 of 1.15 and on 20/07/11 (assumed transaction date) of 1.25) :
If the exchange rates were the other way around and we had ended up with a loss then the entries would have been :
1) convert $ to £ @ 1.25
$100 = £80
20/05/11 Dr purchases £80 Cr payables £80
2) At date of transaction reconvert $100 @ 1.15
$100 = £86.96
20/07/11 Dr payables £80 Dr P&L £6.96 (against exchange loss) Cr Cash £86.96
You cannot of course go about recording an actual exchange rate gain or loss unil the transaction actually takes place so that will be in next years accounts.
You do not have a prepayment as no payment has yet been made.
There is also no accruel as there are no services that have been performed or goods receieved prior to payment.
What you do have is a liability on a contract for transaction that has not yet happened. This would be recorded at the sterling amount of the agreement at the period end and will come under current liabilities (as it will be happening within one year). So, from the above example the £86.96 in trade payables would be the amount shown as a liability for this transaction.
For further details of foreign currency transactions refer to IAS21 under IFRS or FRS23 under UKGAAP.
Hope that I've answered the question that you actually asked rather than a totally different one as I did with Andrews tax point question last night.
Fingers crossed someone will disagree with my appraisal and then you will get a definitive answer based on a debate.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Right, already going to disagree with myself. I quoted based on the exchange rate at 20/05/11 but just been having a read about monetary year end balances and the amount needs to be converted to the rate applicable at the year end.
Therefore there will already be an exchange rate gain or loss to report on the trade payable at the year end on the variance between the rate as at 20/05 and 31/05 even though the actual transaction still hasn't happened yet.
Wonder if that's actually used much in practice or whether people generally just use the year end rate as the initial conversion factor where the transaction is not going to happen until after year end.
That seems somehow wrong as it opens up the ability to manipulate profits... Or is my understanding of this wrong?
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I've worked with FX movements for a few years so I'm quite familiar with them, got all excited and started waffling on about them then realised a) you didn't ask for that and b) shaun had covered it off very well. So delete and start again.
I'm with Shaun, you cannot account for any realised gains/losses until a contract settles.
Also, I am a bit perplexed as the company bought stock in another currency and paid for it, therefore surely it simply cost the GBP equivalent at the time of the transaction. If, however, there are currency bank accounts being used to make these purchases with FX contracts settling them, then yes, then we start to get into the realms of unrealised gains/losses.
Maybe my cold and this weather is fuddling my brain but I'd be interested in find out. I'll go and make a lemsip and await someone else's comments.
OK - our company buys goods (packaging for cosmetics) from Asia and we sell to European cosmetics manufacturers.
Our terms of purchase are FOB Asian port, be that Shanghai, HKG etc... and with new suppliers we have to pay an upfront prepayment or "deposit" for goods at the time of placing an order.
The situation here is that we have placed an order (well two actually) for quite large USD values and as this is a new supplier we have paid them a 20% prepayment/deposit for the order and the goods have not yet been made, let alone delivered and invoiced.
When posting this prepayment this has generated an exchange gain, as we have USD/GBP at default rate of 1.5 and we got 1.585 on that transaction.
We therefore now have an exchange gain of £1000+ showing in May 2011 accounts, but this is attributed to goods that wont be shipped until July and invoiced as sales until August 2011, which is into our next Financial year.
So, to keep accounts correct for year ending 30.5.11, I need to move this exchange gain into June, July of 2011, or we are overstating profits and will incurr additional CT.
Can't you just reverse the prepayment (or book an opposing entry) then change the FX rate and rebook the transaction? Surely it would be easier to do that and then at the year end post a journal to reflect the unrealised gain or loss at that point?
I've been wracking my brain to see if I'm missing something but as far as I can see you just need to write off the unrealised gain.
You will need to reflect an unrealised gain as of 31 May and I'd recommend just doing that with journals rather than trying to post it and risk the package you're using creating further issues.
You can reverse the unrealised gain in July when the contract is completed.
Sorry if my response has made you groan and bang your head on the desk!
Does the company hold a dollar bank account or does it buy it's dollars spot
Do you run the HK supplier ledgers in Dollars?
If you're accounting in $, do you change the system held rate each month (currently $1.50)
Hi Velbee,
I can understand why you're confused, depending on the answers to questions I asked, it may well be a case of posting the "gain" on forex to prepayments.
-- Edited by ADAS on Sunday 22nd of May 2011 11:12:41 AM
-- Edited by ADAS on Sunday 22nd of May 2011 12:35:42 PM
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
We do not have a USD account and yes, we buy the dollars either on spot or with use of forward contracts to secure a rate.
Yes, the suppliers account is set up in USD asthe software handles multiple currencies.
We get exchange gains/losses on every pruchase transaction at the point we pay the invoices, it is just that this exchange gain is showing in May 2011 accounts and clearly doesn't relate to that months (or in this case financial years) sales.
Ridesy
-- Edited by Ridesy on Monday 23rd of May 2011 11:40:52 AM
I think you should take the gain to p&l, assuming that $1.50 was the correct closing rate on 31.5.11 ( as shaun advised up thread). The gain does relate to the accounting period ending 31.5.
I'd look at it this way. A balance sheet is a snapshot of a frozen moment in time. At that date the dollar deposit was worth, say, $1000 x the closing rate, irrespective of the rate you physically paid.
(Shaun - wasn't ignoring what you posted. But in my understanding, it's still allowable to follow the two methods under SSAP 20, rather than the FRS. But please correct me on that if it's not the case. I also had the impression, Ridsey isn't changing the system held rate each month to the closing spot rate)
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Will probably just pass this one back to accountants.
Either I am getting the whole thing upside down or sideways, as we all spend hours each period and certainly at year end apportioning the correct costs in to final accounts.
This exchange gain is real, but relates to turnover/sales that will come from next year.
Example in numbers.
We order 100,000 items at $1.00 each and pay a 20% prepayment on account.
The accounts software has a single exchange rate of 1.50, so when the payment is posted from Sterling account the software shows a sterling payment or $20,000 / 1.5 = £13,333.33.
In reality we paid in sterling at a rate of 1.58 so the actual payment from sterling current account was $20,000 / 1.58 = £12658.23
To balance the current account we do a journal entry to post a currency exhange gain of £13,333.33 - £12,658.23 = £675.10.
Am I wrong in believing that this exchange gain relates to the cost of the goods that we will not be selling until our next year and therefore should this gain not be moved to beyond 31.5.11 in our accounts?
I will pose same question to our accountants, as clearly it will be something they would advise on too, but have I somehow got the wrong end of this somewhere?
Ridesy
-- Edited by Ridesy on Monday 23rd of May 2011 03:09:36 PM
The gain has actually got nothing to do with sales but I can appreciate why you think that - you're buying a product to resell after all. The gain arises because the exchange rate is different at the Balance Sheet date, therefore you need to adjust the sterling equivalent of the Dollar deposit your supplier is holding.
Ultimately it does get reflected in cost of sales because when the goods arrive you will use, £13,333.33 as part of the sterling value of the stock.
I think part of the confusion is that your thinking strictly in terms of the accruals concept, however there is also prudence to take into account, particularly if the closing dollar rate was weaker, say $1.60 instead of $1.50.
In a former life - we used to hold the supplier accounts in dollars and like you paid deposits all the time. At the end of each month, I use to change the system held rate to the closing rate on the day and revalue the whole ledger (and indeed $ a/c) back to spot and take the gain / loss to p&l.
The effect of this is that from the 1st day of the next period, all suppliers and existing dollar balances had the previous months closing spot rate. So when the goods landed in the UK I could use the closing rate to value the goods received. This works because, I guess, you'll be paying for your goods on presentation of documents.
Hopefully that helps a little.
-- Edited by ADAS on Monday 23rd of May 2011 05:50:56 PM
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
