Foreign Currency Gains and Losses in Xero

Not convinced that Xero is working this out correctly

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I took over the accounts function of a small business a while ago, the retiring accountant showed me how to do everything before he left, but I'm stuck with foreign currency gains and specifically the way Xero deals with them, I've contacted Xero about it a few times but they're not really answering my specific query.

We buy foreign currency in tranches when we think the rate is good, we then pay suppliers from that currency until it runs out, so there are no gains or losses through timing, i.e we never enter an invoice at one exchange rate and then pay at a different one.

We set the exchange rate in Xero at the rate we bought the current tranch of Euro's at, so if we got €1.1 to the £, that's how we set Xero so that when we pay someone €110 it works that out at £100 and adds that to supplier costs.

When doing the month end accounts, we set the rate back to the live market rate for the last day of the month (this was advised by previous accountant) and at that point Xero revalues our currency against the live rate and applies a gain or loss to our P&L. This seems wrong to me, we have a load of Euros which we will spend as Euros, it doesnt really matter what the current value vs the Pound is for P&L purposes, we're essentially reporting a loss which is theortetical, it looks at the Euros we've bought at €1.1 and says "well you could have bought those today at €1.16 so this is how much you've lost". The actual loss is incurred through our supplier costs being higher because we bought the € at a worse rate than we might have done.

Can anybody advise the correct way to deal with this? The obvious answer is just to not set the rate back to the live rate on the last day of the month, this leaves the gain/loss at 0 which I believe is correct, but I was explicitly advised that this should be done every month?

Many Thanks

Replies (3)

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John Toon
By John Toon
06th Nov 2019 15:02

I'm going to assume two things here:
1. You report in Sterling
2. You're not hedge accounting in your management info

If those assumptions are right the reporting in Xero is correct, although it's a bit of fudge. You should be recognising gains and losses if you're forward contracting. That's because, unless you hedge account, you may have fixed your cash FX rate but you are still expected to record invoices at spot rate.

As the FX adjustments aren't crystallised until receipts/payments to the nominal or against invoices are made the gains or losses you're reporting are unrealised.

If you run the P&L report and click on the FX nominal it will show you how the numbers reported are made up - realise, unrealised and where they arise - receivables, payables or bank.

A better way to handle this would be to set the rate when Euros are bought for that transaction and revert back to the XE.com rates for all other transactions.

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Caroline
By accountantccole
07th Nov 2019 11:29

Agree with John - are the numbers really that big that you need to worry about it, it'll come out in the wash?

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By Will Johnson
07th Nov 2019 14:50

Thanks for your replies,

Those assumptions are correct.

The entire gain or loss is always unrealised and Xero have told me that in our case it is mostly just revaluations of the currency held in account. It's a £20K loss so far for 2019 so is worth getting right.

Many Thanks

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