Foreign exchange: how to convert foreign currencies in accounting?

We talk about exchange when we convert one currency into another. Several courses are to be taken into consideration.

The exchange rate corresponds to the price in Swiss francs of one or one hundred units of a foreign currency. Currency prices vary daily, depending on supply and demand. Although there are exchange tables for performing calculations, we will not present exchange rates in this article since they are never the same. However, most countries control the exchange rate, in order to avoid too large a variation in the exchange rate, in particular, to control the losses and gains that the variation of the exchange rate can cause when trading in another currency.

The buying price is the price at which the bank buys the foreign currency, while the selling price is, on the contrary, the price at which the bank sells the foreign currency. The difference between the two prices is called the margin for the bank.

The exchange rate is used for the settlement of commercial and financial transactions (without the movement of currencies or banknotes). The price of banknotes is mainly aimed at tourists (movement of banknotes and coins).

Visit also: Multi Currency Accounting in UK

Banknotes and currencies

Since January 1, 2002, the member countries of the European Union have put into circulation coins and banknotes denominated in the same currency: The Euro (EUR). Not all EU countries chose the Euro, including Denmark which kept the Danish Krone (DKK), Great Britain and its Pound Sterling (GBP), and Sweden, whose currency is the Swedish Krona (SEK).

Each member country of the eurozone issues its euro banknotes, as well as its coins which have a common side and a separate side for each participating country.

Thus all the neighboring countries of Switzerland buy in euros, eat-in euros, travel in euros, and compare in euros. Thanks to the single currency, consumers can easily compare prices between countries, since exchange rate variations do not exist in the "euro" zone.

Converting foreign currencies into CHF

To obtain the amount in CHF when we know the amount in foreign currency, the following formula must be applied: Currency in CHF = Foreign currency x exchange rate.

When the rate, expressed in CHF, represents 100 units of foreign currencies such as the Japanese Yen (JPY), the Swedish Krona (SEK), the Danish Krone (DDK), or the Norwegian Krone (NOK), the result must be further divided. by 100.

Example:

When you return from a trip to Europe, you want to change the rest of your Euros amounting to EUR 3,400.-. The Swiss bank or bureau de change, applying, for example, a purchase price of 1.12, will give you: 3'400 x 1.12 = CHF 3'808

If it is 3,400 Yen with a purchase price of 0.8430 the result is: 3,400 x 0.8430 / 100 = CHF 28.65.-

Exchange CHF into foreign currencies

To obtain the amount in foreign currency when the amount in CHF is known, the following formula must be applied: Foreign currency = CHF currency/exchange rate.

When the price, expressed in CHF, represents 100 units of foreign currencies such as the Japanese Yen (JPY), the Swedish Krona (SEK), the Danish Krone (DDK) or the Norwegian Krone (NOK), the result must be multiplied again by 100.

Example:

A Swiss tourist, wishing to travel to France, buys EUR in an exchange office. He donates an amount of CHF 3'500.-. How much will he receive in euros if the sell exchange rate is 1.1294? The result is 3,500 / 1.1294 = EUR 3,099. -

If it is Yen whose ask price is 0.8952, the result is: 100 x 3,400 / 0.8952 = 379,803 JPY.

Finding the price applied during an operation

If we want to know the rate applied during a transaction, simply divide the CHF by the amount in the foreign currency according to the following formula: Exchange rate = CHF currency / foreign currency.

When the price, expressed in CHF, represents 100 units of foreign currencies such as the Japanese Yen (JPY), the Swedish Krona (SEK), the Danish Krone (DDK), or the Norwegian Krone (NOK), the result must be multiplied again by 100.

Example:

In a Swiss bank, the cashier gives a tourist EUR 4'500.- against CHF 4'995.-. What is the applied exchange rate? The result is: 4,995 / 4,500 = 1.11.

Use of foreign currencies in accounting

The currency used for keeping accounts in Switzerland is free, either in the local currency (in Swiss francs) or in the currency most commonly used in the company's activities (Art. 957a para. 4 CO).

However, when presenting the annual accounts, the accounts must appear in Swiss francs. As soon as the accounts are kept in foreign currency, conversion into Swiss francs is compulsory, in principle at the average rate for the month of the closing. In all cases, the conversion rate is indicated in the appendix (Art. 958d CO).

Any currency that differs from the currency used in accounting will be considered as foreign currency. Thus, if a Swiss company acts mainly in the United States, it will keep its accounts in USD, and the CHF will therefore be considered as a foreign currency.

Methods for determining conversion rates

There are various reliable methods for determining conversion rates for recording foreign currency transactions:

• Price at the time of the transaction, transaction price: transactions in foreign currency are recorded at the conversion rate applicable at the time of the transaction;

• Payment price: using for example the rate used by the bank on the day of payment;

• Fixed accounting prices: accounting prices correspond to internal prices determined by the company, which are provisional and fixed for a given period, and are often rounded. The company will need it to convert invoices (which are not recorded during the day or during the payment), rebates, discounts, returns and losses on accounts receivable.

If the company uses the latter method, it will need to be aware of fluctuations in rates. Indeed, if the difference between the fixed internal price and the real prices becomes significant, it will have to be adapted, even during the financial year so that the accounts remain relevant and show a true picture.

When a company chooses a valuation method, it must then adhere to it throughout the accounting year and, in principle, not change it, always according to the principle of regularity (Art. 958c CO).

To calculate VAT and acquisition tax, the Federal Tax Administration (AFC) publishes the prices of the various foreign currencies against the Swiss franc on a daily basis. An average monthly price is also available; it is calculated on the evolution of the price of the previous month. To facilitate the preparation of the VAT statement, these are often used by companies as a reference rate.

Exchange differences

Since the company uses different prices in its evaluation, these price differences will not be counted at the same time:

• accounting as and when for payment transactions and when closing open positions;

• accounting only at the end of the financial year for transactions occurring during the accounting period.

There are different methods and items for recording exchange rate changes during posting. The exchange difference accounts are distributed according to the degrees of the income statement. The variations will thus be identified as being part of the 1st, 2nd or 3rd degree.

One of the most frequently used methods is as follows:

• directly in the initial account for purchases and sales of goods, machinery, and securities, so that the account will always contain the value actually paid;

• in exchange differences account so that the initial account (in Swiss francs) will not be influenced by the future variation. Price variations, being considered as financial risks in the present case, will therefore be part of the financial expenses or income.

Closing of accounts held in foreign currencies

When closing accounts in foreign currencies, for example, accounts receivable in EUR or bank in USD, it is necessary to convert the amount expressed in foreign currencies into CHF using the determined exchange rate and to make a correction entry either as a gain exchange rate or exchange rate loss.

The exchange difference will be calculated periodically (but at least when closing the accounts).

Calculation of the exchange difference made by accounting software

In practice, this is often achieved by the accounting software used. The system should be configured by entering the average rates and the revaluation rates to be used in order to automate the conversion as well as the calculation and posting of the corresponding exchange gains or losses.

Calculation of the exchange difference carried out using the "4-column accounts" method

In learning to account, we learn the "4 column accounts" method. This ultimately allows us to visualize and understand what has been automated in accounting software.

The principle of the 4-column accounts is to take the account in two currencies, namely in functional currency and in foreign currency.

For details, please visit: https://finexoutsourcing.com/