Invoices in foreign currencies: how should they be accounted for?

Recognition of foreign currency amounts

Which currencies should be recorded?

As stipulated in Article 958d of Book Five of the Federal Act Supplementing the Swiss Civil Code, a company operating internationally is free to keep its accounts either in the local currency (Swiss franc) or in the currency most commonly used in its business activities.

However, if the currency used is not the Swiss franc, the conversion of all amounts into their CHF equivalent must be stated when presenting the annual financial statements.

The calculation is then made using the average rate for the closing month, and the conversion rate is disclosed in the notes. It is advisable to comment on it.

As regards the language of the accounts, all three languages spoken in Switzerland are accepted, as is English.

How should foreign currencies be accounted for?

Each invoice recorded must be booked at the exchange rate stated on the invoice on the transaction date, and must be supported by evidence. These entries appear in the balance sheet, the income statement and the notes.

Please note : There is no need to separate expense and income items showing a nil amount.

Converting your accounts from a foreign currency into Swiss francs is done using the closing rate method, that is:

• for the balance sheet and foreign capital, the rate in force at the balance sheet date is applied;
• for the income statement, the average rate is applied, calculated from the monthly rates for the year and weighted accordingly;
• for equity, the historical rate is applied, that is, the rate on the date the transaction took place;
• for the notes, the rates corresponding to the relevant heading are applied to each item.

Because these different exchange rates will inevitably give rise to a translation difference, it is important to comply with both the valuation principles set out in Article 960 of the Swiss Code of Obligations and the recommendations of the Swiss Auditing Manual (MSA).
See also: Paying international invoices in foreign currency

How should VAT be accounted for?

Since suppliers generally invoice international transactions inclusive of local VAT, these transactions are often (when publishing annual accounts) subject to VAT reconciliation.

To this end, the Federal Tax Administration (FTA) publishes daily exchange rates between foreign currencies and the Swiss franc. Monthly rates, calculated from the previous month’s rate trends, are also available there.

The company can then use these reference rates to deduct the related VAT.

Accounting for foreign exchange costs

How should foreign currency transactions be accounted for?

Depending on the nature of your foreign currency transactions, there are three valid methods for booking them at the correct conversion rate:

• the payment rate, the rate used by banks on the transaction date;
• the transaction rate, the exchange rate in force on the transaction date;
• the fixed accounting rate, a fixed, rounded value set by the company over a given period.

This last method is used in particular for recording:

• invoices unpaid at the transaction date;
• provisions and losses on receivables;
• discounts and rebates.

Please note : If exchange rate fluctuations move too far from the company’s fixed accounting rate, it should be updated during the financial year so that it remains representative.

In accordance with the principle of consistency set out in Article 958c of the Swiss Code of Obligations, the valuation method chosen by the company must remain the same throughout the financial year.

How should exchange rate movements be accounted for?

Gains and losses arising from foreign exchange risk are not recognised at the same time, depending on whether they arise from:

• the closing of open items (recognised on the same day); 
• payment transactions (recognised on the same day);
• transactions occurring during the accounting period (recognised at the year-end).

Within the income statement, three levels of exchange rate movement are distinguished. Exchange rate movements relating to securities, machinery, and purchases and sales of goods are thus recognised in the original account.

Rate movements regarded as a financial risk, however, are recorded in the exchange difference account and are therefore separated from the original account; they accordingly represent financial expenses and income.

When closing accounts held in a foreign currency, foreign exchange risk management software will generally calculate the exchange difference at each closing, after converting the amounts into Swiss francs and posting them as a correcting entry (exchange gain or loss).

Accounting for foreign exchange hedging instruments

How should foreign exchange hedging be accounted for?

Gains and losses on foreign exchange hedging instruments are recognised symmetrically with those of the hedged item in the income statement.

The expenses and income of the hedging instruments are therefore found in the same line item or, at the very least, the same heading as those of the hedged item (for example, operating result or financial result).

The expenses and income of the hedging instrument must be recognised at the same time as the transaction of the hedged item.

The recognition of option premiums and of forward points arising from foreign exchange transactions that may result from the use of hedging instruments is done:

• either spread over the hedging period in question (financial result);
• or on a one-off basis on the transaction date of the hedged item (balance sheet).

How should hedged items be accounted for according to risk?

The cases described above assume that the risk is fully (or almost fully) eliminated by the foreign exchange hedging instrument. Specific disclosure must then be added to the notes for each entry.

However, some foreign exchange hedging transactions may only be partial. In that case, the residual risk component must be treated as a separate open position.

In other words, changes in value must then be recognised on the balance sheet as a counterparty in suspense accounts. While unrealised gains are not shown in the income statement, losses must be provided for as a financial result.
Because accounting for your foreign currency invoices is, in itself, a demanding process, it is essential to streamline your international payment operations. With this in mind, b-sharpe makes your foreign exchange operations easier for all types of foreign currency transactions.