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Transaction gains/losses - classification on P&L

My company entered into a contract w/ a customer who pays their invoice in USD but the functional currency (and expenses borne to service the customer) is Euro. As long as the relationship between the Euro and USD doesn't fluctuate +/- 10% from the rate at contract signing, the customer pays us in USD at a locked in contract inception exchange rate (ie .69). However, if the rates in the future fluctuate more than 10% (+ or -), the customer will pay us USD at the then current exchange rate. During 2014 the rates did fall out of this 'collar', and we owe them money (as we overbilled them and they overpaid us). We believe the proper accounting treatment is to charge P&L and credit a liability to this customer. Question - should the charge we take for amounts we owe to the customer related to these exchange rate movements outside the 10% collar be recorded above the line (ie gross margin impact), or below the EBITDA line (ie other income - frx gain/loss).


Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

The separate charge outside the 10% collar is part of your cost and not incidental. So it should be above the line. However, since it involves overbilling and overpayment, a credit memo or a reinstatement/adjustment of cost for 2014 may be in order. (depending on where you are in closing the books).

You may also want to reexamine your revenue and cost transaction triggers to ensure that transactions are recorded timely and properly. From the limited info, I think that you should have been able to record the fluctuation out of the "collar" as soon as it happened.

You may also want to examine establishing contingency accounts or reserves since your business model involves volatile currency exchange rates that you cannot account (or predict) at date of transaction but will affect your bottom line.

Your business model is till fuzzy (to me) and without examining it and looking at your chart of accounts and your transaction flow, it is very hard to be definitive.

Helen Kane
Title: President
Company: Hedge Trackers, LLC
(President, Hedge Trackers, LLC) |

This is an interesting issue. I believe it would be most appropriate to take the changes that occur prior to recording the liability above the line and those that happened after you posted the liability to FX Gain/Loss. If you are out of the "collar" in the billing monthly you would take the difference between the amount you recorded and the income statement rate (current rate at time of billing) for that period and record a margin adjustment. The changes between that rate and the value you receive in USD would go to FX gain/loss, because the liability is a monetary non-functional currency liability whose value must be adjusted to the month end rate (or finally the cash exchange rate).


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