Foreign-currency invoicing in Skyline Nexus ERP

What foreign-currency invoicing involves

Foreign-currency invoicing means billing a customer, or being billed by a supplier, in a currency other than the one your books are kept in. The invoice shows the foreign amount; your ledger records its equivalent in your own currency at the rate on the transaction date. It matters because the rate moves between invoice and payment, and that movement is a gain or loss that has to be accounted for.

This guide explains the accounting rules that apply under IAS 21 and the VAT rules on currency conversion, works a full example from invoice to settlement to period end, and shows how Skyline Nexus ERP handles foreign-currency sales and purchases. Our guide on IAS 21 foreign currency accounting covers the standard in full, including the translation of foreign operations; this guide stays with invoices.

Functional currency and the transaction-date rule

Every entity has a functional currency, the currency of the primary economic environment in which it operates, and its ledger is kept in that currency. A Dutch company's functional currency is normally the euro, a Canadian company's the Canadian dollar. Any other currency is a foreign currency for that entity, even if many of its customers use it.

IAS 21 requires a foreign-currency transaction to be recorded on initial recognition at the spot exchange rate on the date of the transaction. An average rate for a week or a month may be used as an approximation if rates do not fluctuate significantly. The invoice date is usually the transaction date for a sale; for a purchase it is normally the date the goods or services are received and the liability arises.

Monetary items, settlement and period-end differences

Once recorded, foreign-currency items split into two kinds. Monetary items, such as receivables, payables, loans and foreign-currency cash, are amounts to be received or paid in a fixed number of currency units. Non-monetary items, such as inventory, equipment and prepayments, are not. Under IAS 21, monetary items are retranslated at the closing rate at each reporting date, and exchange differences on settlement and on retranslation are recognised in profit or loss. Non-monetary items measured at historical cost stay at the transaction-date rate.

Two differences therefore arise. A realised difference appears when an invoice is paid at a different rate from the one it was recorded at. An unrealised difference appears when an invoice is still open at the period end and is retranslated at the closing rate. Both go to profit or loss; the distinction matters for management reporting and, in many countries, for tax.

VAT on foreign-currency invoices

VAT rules add a second conversion requirement. In the European Union, Article 230 of the VAT Directive allows invoice amounts in any currency, provided the VAT payable or deductible is expressed in the national currency of the Member State, and Article 91 sets the exchange rate to use: the latest selling rate on the Member State's most representative exchange market when VAT becomes chargeable or, at the business's option, the latest European Central Bank rate, which every Member State must accept, though it may ask to be notified. The VAT figure on the invoice and in the return is therefore fixed in local currency when VAT becomes chargeable, usually the invoice or tax point date, and does not change when the rate moves before payment.

Other jurisdictions follow the same logic with their own rate sources. In Canada, amounts for GST/HST purposes must be expressed in Canadian dollars. Check the rate source your tax authority expects, and apply it consistently, because the rate used for VAT can differ slightly from the rate used in the ledger.

Setting up foreign currencies in Skyline Nexus ERP

Skyline Nexus ERP keeps its ledger in the business Currency chosen in Business Settings, and handles foreign currencies at document level. Under Settings, Business Settings, Exchange Rates Center, switch on Enable Multi-Currency (Sales, Purchases and Treasury), choose the currencies you use under Select Currencies You Use, enter the rate for each one, which the screen asks for as how much one unit is worth in your base currency, and Save Rates. Rates are entered manually, so decide who maintains them and from which source, for example the daily reference rate of the European Central Bank or the Bank of Canada.

The Accounting module has its own Exchange Rates screen under Fiscal Authority, with Add Rate, edit and delete, Variance Alerts and a Variance Report, and the Reports menu includes an Exchange Rate Variance Report under Currency and Multi-Entity. These make it possible to see which rates were used and how far they moved. Treasury bank accounts can also carry a currency.

Issuing a foreign-currency sale and recording a purchase

On the sale form, Invoice Currency selects the currency the customer is billed in, and an exchange-rate field appears for the rate to apply. The document is stored and posted in the base currency, and the invoice shows the foreign-currency equivalents, calculated as the base amount divided by the rate. The ledger entry is therefore identical in form to a domestic sale: receivables, revenue and output VAT in the base currency.

For purchases, the Purchases tab of Business Settings enables Purchases in other currency; the purchase then carries a Purchase Currency and a Currency Exchange Rate, and posts in the base currency in the same way. Keep the supplier's invoice with the file: it is the evidence for the foreign amount, while the ledger holds the base-currency equivalent.

Worked example: invoice, payment and period end

An Irish software company, functional currency euro, invoices a US customer USD 12,000 on 10 May, when one US dollar is worth EUR 0.92. The invoice is recorded at EUR 11,040, and the invoice shows USD 12,000, which is 11,040 divided by 0.92. To keep the example on currency, assume no VAT applies. On 9 June the customer pays USD 12,000, which the bank converts at 0.90, so EUR 10,800 arrives. The receivable was 11,040, so there is a realised exchange loss of EUR 240.

A second invoice of USD 5,000 is issued on 20 June at 0.92, recorded at EUR 4,600, and is still unpaid at 30 June, when the closing rate is 0.95. Retranslated, the receivable is worth EUR 4,750, so there is an unrealised exchange gain of EUR 150. The net exchange result for the period is a loss of 90.

• 10 May: Dr Trade receivables 11,040 / Cr Revenue 11,040 (USD 12,000 x 0.92)
• 9 June: Dr Bank 10,800 / Dr Exchange loss 240 / Cr Trade receivables 11,040
• 20 June: Dr Trade receivables 4,600 / Cr Revenue 4,600 (USD 5,000 x 0.92)
• 30 June: Dr Trade receivables 150 / Cr Exchange gain 150 (USD 5,000 x 0.95 = 4,750)
• Net exchange result: 150 - 240 = loss of 90

Recording exchange differences in Skyline Nexus ERP

In Skyline Nexus ERP the invoice and the payment post in the base currency through the normal sale and payment postings, and exchange differences are recorded by the finance team as journal entries. Create exchange gain and exchange loss accounts in the chart of accounts, then post settlement differences when a foreign-currency payment is received or made, and a period-end retranslation of open foreign-currency receivables and payables at the closing rate, reversed at the start of the next period if your policy retranslates from the original rate each month.

Journals are entered under Fiscal Authority, Journal Entries, New Journal Entry. Accounts flagged Requires Party ask for the customer or supplier on the line, and a control account accepts manual lines only if Allow Manual Posting is ticked, so agree the treatment of receivables and payables control accounts with your accountant when setting up. After posting, compare the Customer Ledger and AR Aging Report with the receivables control account, so that customer balances and the ledger tell the same story.

Controls on exchange rates

Because rates drive revenue, cost and VAT, they are a control point. A wrong rate on a large invoice misstates revenue at once, and a rate left unchanged for weeks misstates every document issued in that time. The practices below keep rates reliable without much effort.

• Name one person responsible for rates and a second who reviews them weekly
• Use one documented source, such as the European Central Bank or the Bank of Canada reference rate
• Update rates at least daily in volatile periods, or weekly where an average-rate policy applies
• Review the Exchange Rate Variance Report and Variance Alerts at each month end
• Keep the supplier or customer invoice showing the foreign amount with each document
• Agree the closing rate used for retranslation to the published source, and file it

Managing the currency risk behind the invoices

Accounting records the effect of exchange movements; it does not decide how much risk to take. That decision is made earlier, when prices and payment terms are agreed. Invoicing in your own currency moves the risk to the customer, which is simple but can cost sales. Invoicing in the customer's currency keeps the sale competitive but leaves you exposed for the whole credit period, and the longer the terms, the larger the possible difference.

Three practical measures keep that exposure in proportion. Shorten payment terms on foreign-currency invoices, since a 30-day exposure moves far less than a 90-day one. Match currencies where you can: paying suppliers or staff in the same currency you are paid in creates a natural offset. And for large or regular flows, discuss forward contracts with your bank, bearing in mind that hedge accounting under IFRS 9 has its own documentation requirements. Whatever you choose, report the net exchange result every month, so that currency effects are seen separately from trading performance.

When a foreign operation needs its own ledger

Invoicing in foreign currency is different from operating in another country. A branch or subsidiary abroad whose primary economic environment is that country has its own functional currency, and its results are translated into the group's presentation currency under IAS 21, with translation differences going to other comprehensive income rather than profit or loss. That calls for a separate ledger in the foreign currency, not foreign-currency invoices in the home ledger.

In Skyline Nexus ERP a foreign subsidiary is set up as a separate business, and Fiscal Authority, Consolidation brings the companies together: a business group has a Base Currency, and each member's trial balance is snapshotted and translated to the group currency before intercompany balances are eliminated. Our guides on consolidation accounting and multi-branch accounting in Skyline Nexus ERP explain when each structure fits.