I truly believe in Intuit’s® focus on offering the global small business ecosystem. As a multicurrency freak, I figured that having a multicurrency feature in QuickBooks® Onlinein the US would be a slam dunk. It’s already a QBO feature in other regions, such as Canada and the UK, but, for some reason, it hadn’t made it into the QBO US. That is, until now.
I am delighted to report that, starting in June of 2015, QuickBooks Online Essentials and Plus subscribers in the US can now access multicurrency functionality. I’ve been waiting for some time, but it was worth the wait.
How to turn on multicurrency
Let me describe how multicurrency is enabled in QBO, and how to use it.
When a QBO company is created, by default, multicurrency is not enabled, similar to the QBO you use in the US now, and also similar to QuickBooks Desktop. You must elect to turn on multicurrency in the Company Settings, and this is also irreversible, similar to Desktop.
To turn on multicurrency, select the Gear Icon > Settings > Company Settings > Advanced > Currency and then check the box next to Multicurrency. Then, click on the check box next to I can’t undo multicurrency and selectSave.
What happens when multicurrency is enabled?
First, when multicurrency is turned on, a new list appears in QBO: the Currency List. This contains all the world’s currencies, including Bitcoin (although most currencies are hiding, they’re available from a drop-down box for selection). Access this list by selecting the Gear icon > Lists > Currencies.
All currencies selected will automatically have exchange rates populated for all previous dates up to the current date. No maintenance of exchange rates is required. This is a huge improvement over Desktop, which forces you to maintain the historical rates by downloading current exchange rates, or by manually entering exchange rates for any date. Of course, any transaction’s default exchange rate can be overridden, and the overriding rate can replace that date’s populated rate, if desired. This would help account for forced exchange rates, such as those mandated by bank transfers or foreign credit card charges. QBO allows for exchange rates, accurate up to 7 digits.
What else happens to the interface in QBO when multicurrency is enabled?
Any general ledger accounts, Customers and Vendors that were already in QBO prior to turning on multicurrency are automatically assigned the Home Currency (and there is a Currency column in each of these lists). Any new balance sheet accounts (other than equity accounts), Customers or Vendors can now be assigned a currency, as seen below. This is another improvement over QuickBooks Desktop, which allows only the following account types to be assigned a foreign currency: Bank, Credit Card, Accounts Receivable and Accounts Payable.
However, There is no need to create foreign Accounts Receivable and Accounts Payable general ledger accounts. That’s because QBO creates them for you as soon as you create a Customer or a Vendor in a new foreign currency.
All these lists – the Customer Center, the Vendor Center and the Chart of Accounts – now feature a Currency column. Any balance for any foreign name in any of these lists is the balance denominated in that foreign currency. The $100,000 balance for the Canuck Bank is $100,000 in Canadian dollars. The value in the Home Currency, as you will see later, is reflected on the Balance Sheet.
The Money Bars at the top of the Customer and Vendor Centers display total amounts for each colored bar category in the Home Currency, based on the Home Currency value of each transaction, making up the balance. The balances for each name in the Customer and Vendor Centers, as well as individual transaction balances in these Centers, are denominated in the native foreign currency.
There is one other user cosmetic difference in QBO once multicurrency is enabled … all forms with templates (invoices, purchase orders, etc.) that get sent to a Customer or Vendor now include the currency symbol in the total, even if the transaction is denominated in the Home Currency. There is no way to turn this off.
How does multicurrency work?
When a transaction is recorded in a foreign currency, QuickBooks records all the information it normally does, with some additional informational fields as well. For example, QuickBooks records the debits and credits in the foreign currency, as well as the name of the currency, the exchange rate for that transaction, and the resulting debits and credits translated in the Home Currency. The exchange rate comes from the Currency List, which is populated automatically by real-time exchange rates that are looked up every four hours.
The exchange rate on any transaction can be overridden by the user, if required. QuickBooks will then inquire about whether this override exchange rate is to be the new rate in force for that date, or if it is to be in force only for that transaction.
The current day’s exchange rate in the Currency list can also be overridden.
That’s all for basic features of multicurrency and its setup. Now, let’s put it into practice to see the workflows.
In the invoice below, the Canadian dollar customer is being invoiced for $1,000 CAD, which, at the exchange rate in place for that transaction (there’s a field for that right on the invoice), is worth $818.91 USD. Again, I can override the exchange rate there if I want, but I’m keeping what is offered for this demonstration.
Despite what we see on the screen version of the invoice, the printed or PDF version does not display the Home Currency information. The Canadian customer sees an invoice for $1,000 in his or her own native currency, and is oblivious about what it’s worth in US dollars. The customer just knows to fork over $1,000 of his or her currency to pay this invoice in full.
Behind the scenes, I can produce this Journal report, modified to display foreign debits and credits, the currency, and the exchange rate, in addition to the (Home Currency) debits and credits that display by default:
By the way, this is another example of how QBO’s multicurrency feature outshines QuickBooks Desktop. Desktop allows the user to add a single column for foreign amount to a report, but I have wanted separate columns for foreign debits and foreign credits for ages!
Exchange Gains and Losses calculated automatically
One of the beautiful things about QuickBooks is that it calculates exchange gains and losses automatically in many cases, if the foreign exchange rate changes from the date you “opened” a transaction’s workflow to the date you “closed” it (read on if this isn’t clear). Let’s face it … rates fluctuate all the time, so this is likely to happen more often than not. Let me illustrate by providing an example related to the invoice I just showed you.
On May 21, I invoiced a Canadian dollar customer for $1,000 CAD on invoice #1012. Let’s call this “opening” the transaction workflow, related to invoicing. At the time of the invoice, the Canadian dollar was worth $0.81891 US dollars (or 81.891 cents US). The foreign amount of that invoice was $1,000 CAD, and due to the exchange rate at the time, the Home Currency value was $818.91 USD. QuickBooks recorded the foreign debits and credits, as well as their Home Currency value debits and credits, to the general ledger accounts in question. Sales were credited $818.91 USD (Home Currency) and $1,000 CAD (Foreign Currency), and Accounts Receivable – CAD – was debited $818.91 USD (Home Currency) and $1,000 CAD (Foreign Currency).
At this point, there is no foreign exchange gain or loss involved. That’s because the transaction workflow was merely “opened.” The fun part with exchange gains or losses takes place only when the transaction workflow is “closed,” which refers to receiving a payment on the invoice so that the money is no longer owed.
Let’s assume that by the time the invoice was paid in full (i.e. the invoicing workflow was “closed”), perhaps on May 25, the Canadian dollar weakened and was worth only $0.80 US. The Canadian customer paid the invoice in full, and from their perspective, they didn’t owe anything more. And, from the point of view of QuickBooks, my accounts receivable of $1,000 CAD was cleared.
But, instead of the Home Currency value of $818.91 USD, which I expected to get paid when I originally issued the invoice, I received a value of only $800 USD. So, QuickBooks cleared the Canadian dollar receivable with a Home Currency value $818.91 USD (and the foreign balance of $1,000), put $800 USD Home Currency value (now worth the $1,000 CAD) into the bank or undeposited funds, and debited the Exchange Gain or Loss expense account $18.91 for the loss.
If the foreign payment went into Undeposited Funds, rather than directly into the bank, there would be a further “closing” transaction to complete the workflow entirely and put the funds into the bank. If, by the time the money was deposited into the bank, there were another change in the exchange rate, there would be a further Foreign Exchange Gain or Loss calculation and entry automatically by QuickBooks.
If we had been discussing Accounts Payable instead of Accounts Receivable, all these calculations would have been reversed. In other words, if this had been a Canadian dollar vendor to whom I owed $1,000 Canadian in Accounts Payable, there would have been an $18.91 gain on foreign exchange. This is because I only had to come up with the equivalent of $800 USD to pay off the vendor, instead of the originally anticipated $818.91 USD.
Foreign account balances
Another beautiful aspect of multicurrency accounting in QuickBooks is that it not only tracka the Home Currency value of each transaction, but also displays the foreign account registers denominated in the foreign currency attached to that account. This is very useful for Bank and Credit Card accounts because it allows me to reconcile these accounts in their native currency (comparing the numbers in the Reconciliation Window to those on paper statements or online banking reports) without worrying about what they’re worth in the Home Currency. And, it’s useful for Accounts Receivable and Accounts Payable because it enables me to discuss balances owed for foreign Customers and Vendors in their native currency, basically comparing apples with apples.
Home Currency Adjustment
Now that you know how foreign exchange gains and losses work in QuickBooks, I must warn you that, from time to time, we might see a strange Home Currency balance for foreign accounts on the Balance Sheet.
Keep in mind that the Balance Sheet, just like Profit & Loss, is a “summary” report that does not display individual transactions. Therefore, the balances on these reports reflect the sum of all transactions in each account, and if these are foreign transactions, they are calculated at the Home Currency value of each at the time of the transaction. The balances don’t take the sum of all foreign-denominated transactions and convert their total at one exchange rate; the balances take each transaction at its own exchange rate to get the Home Currency value, and then the Home Currency values are added up. That will help explain the seemingly odd foreign account balances we might encounter.
For example, I might have a bank balance of 1,000 Euro showing in a Euro bank register, but on the balance sheet, I’m seeing -$212.50 USD as the Home Currency value. Or, even more glaring, I may have a Euro bank balance of 0 Euro. Does it stand to reason that the Balance Sheet should show $0 USD as its value? But, what if the Home Currency value isn’t zero? Why is the Home Currency balance wrong? And, how do I fix this?
First, let’s see how the Home Currency balance can be wrong. Let’s take a simple example to illustrate:
Example: Let’s say I received 1,000 Euro at the beginning of the year from the sale of goods to a European Customer, and, at the time, due to the exchange rate, it was worth $1,500 USD. Let’s also say that I put it into a Euro bank account at a US bank, or maybe, I stuffed it in my mattress. Either way, if there are no other transactions, I still have the 1,000 Euro at the end of the year. Now, let’s say the Euro strengthened during the year so that it was now worth $2,000 US. So, now I have to send 1,000 Euro to a European Vendor. I am using up all my Euros to pay this Vendor. My Euro balance is 0 in the Euro bank account (either that or my mattress is empty), yet the Balance Sheet would show a Home Currency value of negative $500 USD. Remember, there was a balance worth $1,500 USD in the Home Currency at the start of the year, and then paying the Euro vendor at the end of the year depleted that balance by the equivalent of $2,000 USD. So, my 0 Euro account/mattress now has a Home Currency value of -$500 USD.
This is just a very simple example using just two transactions. The balance sheet shows the cumulative balance of the account in the Home Currency based on the Home Currency value of each of the transactions, using the exchange rate in force for each transaction. Imagine how fluctuating the Home Currency balance might become with many transactions over time, coupled with wild exchange rate swings.
In these cases, it’s obvious that the automatic Foreign Exchange Gain or Loss calculations aren’t sufficient in making sure that multicurrency accounting is tied up neatly. This is true, especially at a year-end or other period-end. At this time, for reporting purposes, I wish to make sure that the values of my foreign balances are correctly reflected at the exchange rate on the valuation date.
So, to fix this problem, here comes the Home Currency Adjustment to the rescue.
A Home Currency Adjustment enables me to change the Home Currency value of foreign balances without changing the number of foreign currency units (Yen, Euro, Peso and any others), which would, otherwise, mess up my bank reconciliations of these foreign accounts.
I access the Home Currency Adjustment screen first by selecting the Gear icon > Lists > Currencies.
Then, I click on the drop-down box next to the currency I want to revalue (I can perform this adjustment only one currency at a time), and select Home Currency Adjustment.
In the Home Currency Adjustment screen, I can select a different currency from the drop-down box, or leave it as-is, select the currency valuation date and then accept the default exchange rate for that date or override it. Then, I select Revalue.
Then, I select any or all of the balances I want to revalue (note that there is a separate row for each foreign vendor and foreign customer with a balance), and I can preview the expected Exchange Gain/Loss for each line in the far right column.
Up until this point, these gains and losses are unrealized. If I don’t want to record this adjustment but wish to accrue for unrealized exchange gains or losses, I can do so using these numbers (and reverse the accrual the first day of the next accounting period).
However, the instant that I select Save and record this adjustment, these gains and losses become realized. That means they affect the Profit & Loss statement and become part of the balance in the Exchange Gains or Losses account.
That Exchange Gains or Losses account, therefore, should contain two types of transactions:
- Automatic calculations by QuickBooks of gains or losses, based on opening and closing receivables and payables transactions.
- Home Currency Adjustment transactions, which are initiated by the QuickBooks user who wishes to revalue foreign balances.
These Home Currency Adjustments appear as Journal Entries, but do not try and use a regular Journal Entry window to revalue foreign balances! You must use the Home Currency Adjustment screen; otherwise, you will alter the foreign balance, as well as the Home Currency balance of any account you’re adjusting.
If there are any transactions in the Exchange Gains or Losses account that are not related to receiving foreign customer payments on invoices, depositing foreign customer payments from Undeposited funds and paying foreign bills or Home Currency Adjustments means that someone has made entries affecting this account. Some of these entries may be legitimate, but in my experience, Exchange Gains or Losses have been a very convenient place for people to stick entries they either don’t know what to do with or want to hide. These transactions must be investigated and corrected, as necessary.
Unrealized Exchange Gains & Losses
As I said, until any foreign account has been revalued, using a Home Currency Adjustment transaction and a valuation exchange rate (or payment made to “close” a receivable or payable workflow), these potential exchange gains or losses are unrealized. To see a report of unrealized gains and losses on foreign exchange for a specific currency, I can start the Home Currency Adjustment process shown above, and review the Exchange Gain/Losscolumn without actually selecting Save.
Another way to see unrealized gains and losses on foreign exchange is to run a report, which shows potential gains and losses for all currencies in use. Select Reports > All Reports > Business Overview > Unrealized Exchange Gains & Losses.
Choose the valuation date and accept or override any of the default exchange rates for that date. Select Continue. Any unrealized (i.e. potential) exchange gains and losses will appear on this report, account by account, name by name, showing these columns and totals:
The information in this report can be used to accrue unrealized exchange gains or losses, and then reverse the accrual as required.
But remember, if a Home Currency Adjustment was just entered for all of the currencies involved, this report will be empty.
Realized Exchange Gains & Losses
Another useful report is the Realized Exchange Gains & Losses, accessed by selecting Reports > All Reports > Business Overview > Realized Exchange Gains & Losses.
What’s next for QBO and multicurrency? These my gut feelings and aspirations:
Since QBO is the LEGO of accounting software, it really is a new toy every day. As with the rest of QBO, Intuit developers are constantly improving the features. I don’t have a crystal ball, but I imagine we’ll have some improvements down the line involving the following:
- Being able to convert a QuickBooks Desktop file with multicurrency in it to QuickBooks Online with multicurrency. At the present time, multicurrency can only be turned on in QBO after a non-multicurrency company has been created from scratch or converted from QuickBooks Desktop.
- I’d like to see Accounts Receivable and Accounts Payable reports that can be filtered for just one currency at a time.
- I’d like to see purchase and selling prices on Products and Services that are denominated in foreign currency and don’t fluctuate with the exchange rate.
- I’d like to see a Transaction Journal report that can be run from any transaction to be customizable to include the foreign debits and credits. Better yet, I’d like the Transaction Journal report on foreign transactions to include the foreign debits and credits, and exchange rate, without requiring the user to make any customizations.
When I was asked to write this article, I jumped at the chance for three main reasons:
- I’m just a multicurrency freak. It’s a niche of mine and I’ve created many training materials aimed at educating accounting professionals and their clients on why tracking multicurrency is so important. The fact is that the inherent risk in dealing with multiple currencies can literally make or break a business, regardless of what that business is selling.
- This brings home the whole “global small business ecosystem” notion. Intuit is, indeed, walking the walk, as well as talking the talk. I love being part of it.
- I’m a Canadian, so writing this article for a US audience, and doing it from Israel (I’m here for my daughter’s wedding) seems so cool to me
Originally Published in: http://blog.accountants.intuit.com/?p=41602&s_cid=E-NEWS_PAP