New Multicurrency Features in QuickBooks Online
As someone with many clients using the QuickBooks® Online (QBO) multicurrency function, I have been eagerly awaiting the new multicurrency features in QBO. They were rolled out in the various countries’ versions a few months ago; I’ve been testing them out.
The examples in this article were produced in the Canadian version of QBO, but they relate to all countries’ versions.
First, let’s look at the transactions I entered. This is a Canadian company and the home currency is the Canadian dollar. I created a U.S. customer and a U.S. vendor, with whom this company does business in U.S. dollars.
On Jan. 1, 2017, my Canadian company invoiced this U.S. customer for $100,000 USD when the USD was worth $1.34434 CAD:
One thing I noticed right away was that the total Home Currency value of the invoice was $134,434.90 CAD (see the highlighted amount on the invoice), which is 90 cents more than I expected it to be, based on the exchange rate. What does this tell me? It tells me that although the exchange rate is initially displayed to five decimal places, it really functions to six decimal places.
In fact, if you put your cursor in the exchange rate field and move to the right, you’ll see that there is a sixth digit lurking (I really wish they’d make the exchange rate field wider so there would be no confusion).
I invoiced the same customer on Feb. 14, 2017 for $100,000 US when the U.S. dollar was worth $1.30705 CAD:
And, I received $50,000 US from this customer on April 30, 2017, when the U.S. dollar was worth $1.36655 CAD, which I applied to the first invoice:
I had some other transactions in 2017 as well, related to bills and cheques, including the purchase of a humongous building in the United States, denominated in U.S. dollars. It’s so cool that I can track a fixed asset on the balance sheet and assign a foreign currency to that account!
If I QuickZoom on the amount for the Exchange Gain or Loss (that is the realized Gain or Loss) ….
… I get the list of transactions that automatically generated an exchange gain or loss, which, in the case of this company, is the one payment #1234 received from the U.S. customer of $50,000 on the previously-generated invoice with a different exchange rate.
Let’s do the math.
The original invoice #27 for $100,000 USD was worth, at the time and prevailing rate of exchange, $134,434.90 in Canadian dollars, our home currency. When the U.S. customer paid half of that, or $50,000 USD, we expected to receive the equivalent of $134,434.90 CAD divided by 2, or $67,217.45 CAD. But, hold your horses: when payment #1234 for $50,000 USD was received, the exchange rate had changed to $1.36655, and instead of receiving the equivalent of $67,217.45 CAD, we received the equivalent of $68,327.50 CAD. The difference between $67,217.45 CAD and $68,327.50 CAD is a $1,110.05 CAD Foreign Exchange Gain (since we received more than we expected to receive in the home currency, once the exchange rate difference sorted itself out). Therefore, this appears as a negative expense on the Profit and Loss report for the period.
That’s great! But let’s get back to the Profit and Loss report: did anyone notice the “Show unrealized gain and loss” checkbox in the header section? I hope you did; I kind of highlighted it for you. (Here it is again, below.) It is available in other reports too, as you’ll see later. What does this checkbox do?
If we check this box and click on Run Report with no other transactions having been entered, not a whole lot changes, except for an Unrealized Gain or Loss line with a $0.00 balance appearing in the Profit and Loss report:
That’s because QuickBooks is saving that line for Home Currency Adjustments (HCAs). Remember what those are? HCAs allow you to take outstanding foreign balances on your balance sheet and revalue them at given points in time to account for differences in the exchange rate. Sometimes, companies will do HCAs only at the end of a fiscal year; some don’t bother at all. But, when there are wild swings in a currency’s exchange rate with the home currency, and when the balances in a foreign currency are large, these balances should be adjusted regularly as the amounts of the adjustments can be quite substantial and can have a major impact on a company’s financial statements.
Don’t believe me? Let’s take a hypothetical example, with the Marx Brothers’ fictitious foreign country, Freedonia, from the movie “Duck Soup.” I’m going to name the Freedonian unit of currency the “Freedo” (monetary symbol F) and when it first goes into circulation, it’s at par with the Canadian dollar.
My Canadian company, which has a calendar year-end, sells widgets to a Freedonian customer for F100,000, worth $100,000 CAD on Dec. 1, 2017. Further to that, my company buys a building in Freedonia City, the capital, for F5,000,000, worth $5,000,000 CAD on Dec. 15, 2017. I capture all this in QuickBooks Online. By the way, it’s nice to know that QBO lets me assign a foreign currency to fixed asset accounts, in addition to any balance sheet account other than equity, accounts receivable and accounts payable accounts. That’s a huge improvement over QuickBooks Desktop.
Now, imagine that on Dec. 20, 2017, there is a huge coup in Freedonia and a state of uncertainty ensues. The government collapses and the Freedo is now worth about $.05 CAD. My Freedonian customer is still in business, as he’s supplying widgets to the Freedonian rebels, so I’m not writing off the receivable to bad debt. I know I’ll get my F100,000 eventually in 2018, but what will they be worth in Canadian bucks? And what about my Freedonian building?
This would call for a HCA on Dec. 31, 2017 to account for the revised value of my Freedonian assets (and Freedonian liabilities, if I had any). That would result in a foreign exchange loss of $95,000 CAD on the receivables and another loss of $4,750,000 CAD on the building. Even if I had Freedos stuffed into a mattress as an asset on my balance sheet, I’d have to revalue those as well. This could well be the difference between a black bottom line and a red one. The HCA is vital to capture everything regarding the health of a business, especially one that has major dealings with other countries in their currencies.
OK, now that we’ve established the need for HCAs, let’s get back to our example with real currencies and transactions in QBO.
Let’s pretend we want to revalue the USD balances as of Dec. 31, 2017. We click on the Gear icon > Currencies to get to the Currency list.
Then, in the Action column next to the US dollar, click on the drop-down next to Edit currency exchange and then select Revalue currency.
The Revalue USD against CAD screen appears with today’s date and, in the Open Balances tab, today’s balances appearing by default.
I change the Revalue date to Dec. 31, 2017 and the exchange rate for the chosen currency (the USD) with the home currency (CAD) automatically changes to the market rate on that date, but I can overwrite it with a custom rate if I want. In fact, let me do that. I choose that the USD is worth 1.26 CAD on Dec. 31, 2017, I add a memo, and I click on Revalue and Save.
Now I get a confirmation that the exchange gain or loss (unrealized, that is) can be viewed on the Profit & Loss, Balance Sheet, and the Customer Balance and Vendor Balance reports (if you check the box next to “Show unrealized gain and loss” at the top of each report). By the way, the exchange gain or loss can also be viewed on the Statement of Cash Flows report; this report also features the “Show unrealized gain or loss” checkbox at the top.
Now let’s go back to the Profit & Loss report with the checkbox next to “Show unrealized gain and loss” checked:
Now the Unrealized Gain or Loss appears with a non-zero amount. Let’s QuickZoom in on that figure:
QuickBooks takes every open balance in the A/R and the A/P in USD and revalues them as of the valuation date. The total unrealized gain or loss will show up in the row for each of these open transactions, so that you can easily see how all home currency adjustments affect each transaction.
The journal entry that it creates, however, is somewhat confusing, and I’m glad that the Memo/Description column has “This is a placeholder for you …” in it. Some might see this $0.00 journal entry and be tempted to delete it. Ummm. Don’t. Don’t delete it!! You’ll ruin everything. And then then the next thing you know we’ll get invaded and our own home currency will be Freedos.
Back to reality. If you open this $0.00 journal entry that you are not ever deleting, you’ll see something really interesting.
You’ll see that there are two accounts in this journal entry with non-zero figures: the U.S. Checking and the U.S. Building accounts. These two U.S.-denominated balance sheet accounts were revalued by the same “Revalue currency” transaction as the A/R – USD and the A/P – USD accounts, but these accounts were treated differently. The revalued U.S. Checking and U.S. Building account balances appear on the balance sheet, regardless of whether the “Show unrealized gain or loss” checkbox is checked or not. In other words, these accounts reflect realized foreign exchange gains or losses. The same would be true for a revalued foreign credit card account, or any foreign balance sheet account that is not Accounts Receivable or Accounts Payable.
For the time being, the “Revalue currency” transaction will treat foreign Accounts Payable and Accounts Receivable accounts revaluations as unrealized gains or losses. All other foreign balance sheet account (other than equity accounts, which cannot be assigned a foreign currency) revaluations will be treated as realized gains or losses.
Since the $0.00 placeholder journal entries are confusing to the naked eye, you may be wondering where to find reports on how foreign balances were revalued. For that kind of information, you would go back to the Revalue screen by clicking on the Gear icon > Currencies to get to the Currency list, and then in the Action column next to the US dollar (or whatever foreign currency you want), click on the drop-down next to Edit currency exchange and then select Revalue currency. This time, however, click on the Revalue history tab.
There is much more to this story. Multicurrency, foreign exchange and HCAs are not for the novice QBO user. These are very complex topics, and the top brains at Intuit® are working night and day to make sure that these features work for everyone the way they were meant to work. Yes, we all want them to be bullet-proof, but even bullet-proof vests started out as a work in progress.
In the meantime, please check out this amazing Knowledge Base article to get a taste for all the aspects of Multicurrency.
If you have any comments about the Multicurrency functionality, please let me know and I’ll pass it along to the beautiful minds at Intuit. Intuit, QuickBooks and Multicurrency are all near and dear to my heart, as many of you are aware. Together, let’s perfect QBO into a truly global masterpiece.