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Purchase in Foreign Currency

Dear sir/madam,

Our company has expanded and has been doing business in foreign currencies. We are investigating some issues we are having with our ERP system and want to restructure a few settings.

In order to properly account for all transactions we have been setting up new accounts and logical settings, but we run into the following problem.

Our company buys some products overseas (we are a European country) and buys these products in USD, our local books are in EUR. The issue exists with the following: We mostly have fixed prices agreed with our suppliers, but not always do we have the actual correct price as small fluctuations might occur. Let me give an example that occurs from time to time.

Local Currency = EUR
Foreign Currency = USD
Purchase Order Value = 1,000 USD
Invoice Value = 950 USD
EUR/USD rate @ creation PO 1.10
EUR/USD rate @ receiving goods 1.075
EUR/USD rate @ recording invoice 1.081
EUR/USD rate @ paying invoice 1.076

The difference occurs due to the purchasing department not having the accurate price.

Upon creating the Purchase order, this order has a value of 1,000 USD (let us say for one product). The value of the PO in EUR would be 909 EUR (EUR/USD @ 1.10)

When we receive the goods we check the status in the PO as received and our ERP system will automatically record the following entry:

Dt. Inventory (B/S) 930 EUR (1,000 USD @ 1.075)
Ct. Accrual GR/IR (B/S) 930 EUR (1,000 USD @ 1.075)

A few weeks later we actually receive the invoice, but we note that we have a buying price of 950 USD.

Suggestion is to record the following:

Dt. Accrual GR/IR (B/S) 930 EUR
Ct. Accounts Payable (B/S) 878 EUR (950 USD @ 1.081)
Ct. Purchase Price Difference (P&L Cost of Sales) 52 EUR

When we then pay the invoice 30 days later, we record the following:

Dt. Accounts Payables (B/S) 878 EUR
Dt. Realized Currency Loss (P&L) 5 EUR
Ct. Cash EUR (B/S) 883 EUR (950 USD @ 1.076)

The question I have is related to the 2nd entry, when receiving the actual invoice and thus reversing the Accrual GR/IR. Should we in this scenario split the amount of Currency Difference from the amount of Purchase Price Difference? Because the Purchase Price difference is part of Cost of Sales and would impact Gross Profit. Where Currency Gains/Losses do not end up in Gross Profit.

If we would split, we would come to the following:

Dt. Accrual GR/IR (B/S) 930 EUR
Ct. Accounts Payable (B/S) 878 EUR (950 USD @ 1.081)
Ct. Purchase Price Difference (P&L Cost of Sales) 46 EUR (50 USD @ 1.081)
Ct. Unrealized Currency Gain (P&L) 6 (remaining difference)

We hope to receive some advise in how to handle this practical problem.

Much appreciated!

Answers

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon
I would contact the consulting firm that implemented the ERP system at your company and ask them how it should be set up to manage transactions in foreign currencies. They should know that.

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