Wierd accounting treatment - anyone else come across it?

Wierd accounting treatment - anyone else come...

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Whilst out on audit this week, I have come across my client posting FX gains and losses on stock purchases to cost of sales.  Apparently, their previous auditors had insisted on this, but to me it seems bonkers.  Surely, the cost of the goods is based on any exchange rate on the date of purchase, and any subsequent change is an admin expense or gain, purely dependent on changes in exchange rates.

What does everyone else think, before I look stupid for raising it with the Responsible Individual?

Thanks

Replies (14)

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By Tonykelly
16th Sep 2011 14:10

why is it weird?

I don't think it is. If their purchases are coming from overseas then any loss or gain on exchange is as a result of making those purchases, so it makes sense to post it to cost of sales.

 

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By Neil Douglas
16th Sep 2011 14:21

Exchange gains

I thought these were an 'other gain or loss' and went in the Statement of total recognised gains/losses (FRS 3)? I guess though it depends how material the amounts are.

 

Neil Douglas

Eureka Software

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Euan's picture
By Euan MacLennan
16th Sep 2011 14:23

Makes sense to me

If the FX differences can be identified specifically to purchases of stock, then Cost of Sales seems the right place to post the FX differences.

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Replying to User deleted:
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By User deleted
16th Sep 2011 14:35

Matching?

Euan MacLennan wrote:

If the FX differences can be identified specifically to purchases of stock, then Cost of Sales seems the right place to post the FX differences.

So, where would you post a forex difference arising on the purchase of a fixed asset?

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Replying to User deleted:
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By Euan MacLennan
16th Sep 2011 14:44

Matching

BKD wrote:

Euan MacLennan wrote:

If the FX differences can be identified specifically to purchases of stock, then Cost of Sales seems the right place to post the FX differences.

So, where would you post a forex difference arising on the purchase of a fixed asset?

To the cost of the fixed asset, unless there is more to your question than meets the eye.

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Replying to Jimess:
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By User deleted
16th Sep 2011 15:11

More to my question?

Euan MacLennan wrote:

BKD wrote:

Euan MacLennan wrote:

If the FX differences can be identified specifically to purchases of stock, then Cost of Sales seems the right place to post the FX differences.

So, where would you post a forex difference arising on the purchase of a fixed asset?

To the cost of the fixed asset, unless there is more to your question than meets the eye.

Not really, but I don't agree with that treatment. If you add/deduct it to/from the cost of the asset, you are effectively re-translating a non-monetary asset, which you should not do. Most exchange gains and losses ought to be taken to the profit and loss account.

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By Steve McQueen
16th Sep 2011 14:32

Yup

Concur with others, when I have dealt with clients who have purchased goods for resale from overseas, I have always seen X-rate diffs posted to COS

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Teignmouth
By Paul Scholes
16th Sep 2011 14:32

Client choice?

Hi - in principle, I agree with you, costs are recorded in accordance with the accounting policy, ie at the exchange rate applying then and so any subsequent +/- on exchange is a financial cost. 

Having said that however, I would have no problem showing the cost in the part of the P&L best suited and, in this case, it would appear as though COS is right.  I'm also sure this treatment would make far more sense to the management, after all these are their accounts, and putting the cost there would better enable them to judge the merits of buying from other suppliers, especially in the UK.

 

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By carnmores
16th Sep 2011 15:21

there is another point re FX

and that is the accounting system itself - may people use the wrong rates in their software , obviously for a variety of reasons, so that forex gains/losses arise when they should not otherise do so - best practice nevertheless is to convert each transaction at the prevailing rate and if there is a foreign currency account difference at the period end take that to the PL and show separately - you may also need to make a judgement on whether this is a realised or unrealised gain  as and show seapazand , see the slightly bizarre question resee seesee the slightly bizarre answer re the Fixed asset above

 

edit - i have typed the words correctly some have come out incorrectly - lost in translation obviously

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Replying to petersaxton:
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By User deleted
16th Sep 2011 17:53

I have found this with the new AW

carnmores wrote:

and that is the accounting system itself - may people use the wrong rates in their software , obviously for a variety of reasons, so that forex gains/losses arise when they should not otherise do so - best practice nevertheless is to convert each transaction at the prevailing rate and if there is a foreign currency account difference at the period end take that to the PL and show separately - you may also need to make a judgement on whether this is a realised or unrealised gain  as and show seapazand , see the slightly bizarre question resee seesee the slightly bizarre answer re the Fixed asset above

 

edit - i have typed the words correctly some have come out incorrectly - lost in translation obviously

In certain situations things you type don't appear in the edit box when you type them, but re-appear when you post, I think it is generally when you are using the quote function!

As an aside, or perhaps on topic, my opinion is as long as you are consistent with the treatment year on year, it is not wrong to post fx adjustments to COS, but I wouldn't revalue an asset.

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By simplesimon
16th Sep 2011 14:56

Thanks for the feedback everyone.

I can see the perspectives raised, but doesn't putting the exchange gain or loss to the same place as the principle transaction (i.e. CoS) defeat the point of making the adjustment?  What I mean is, why bother calculating a gain or loss when the end result will all end up in CoS, with no visible recording of the gains or losses arising?  The only time I can think of that it will make any difference is at the year end, re retranslation of balances!

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By Euan MacLennan
16th Sep 2011 16:17

@BKD

We may be at cross purposes.

I am not talking about re-translating a non-monetary asset originally denominated in a foreign currency for every subsequent year's exchange differences.  Yes - of course - you do that for monetary assets (debtors, creditors, bank account, etc.) denominated in foreign currencies, but not for a fixed asset.

My reason is simply that the fixed asset should be stated in the balance sheet at the cost of bringing it into use.  If it is a simple one-off acquisition with reasonably prompt FX payment, I would include any exchange differences between the internal rate used for the transaction and the actual rate of the payment in the cost of the asset, i.e: I would include the fixed asset at its actual cost in the home currency.  It would be different if the fixed asset were the result of a long-term construction project.

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By User deleted
16th Sep 2011 17:19

Not so sure

If I purchased an asset in foreign currency that, at the time of the transaction, translated to £20,000 then £20,000 is what I would stick on the balance sheet. If settlement occurred 2 months later, at which time the Sterling cost was then £22,000, my £2k difference would go to the profit and loss account. It is a real forex difference, and according to the FRS or FRSSE that difference should be taken to the P&L - I can't find anything in the Standards that would support an addition to the cost of the asset. I can see the logic in doing so, but if we're told to take it to the P&L then that's what I'd do with it. (But I'll be happy to be pointed in the right direction!)

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By zarathustra
16th Sep 2011 19:03

Sensible place for it

I have only ever posted exch rate diffs on stock purchases to COS.

As regards what is the point of separating it out, I dont really think there is one.

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