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, it is important to specify, when presenting the annual accounts, the conversion of all amounts into their equivalent values (expressed in CHF).

The calculation is then made using the average price for the month of the financial year-end, and the conversion rate is stated in the notes to the financial statements. It is therefore advisable to provide an explanation of this.

As regards the languages used for accounting purposes, all three languages spoken in Switzerland are acceptable, as is English.

How should foreign currencies be accounted for?

Each invoice recorded must be entered at the exchange rate stated on the invoice on the transaction date, and must be accompanied by supporting documentation. These details will appear in the balance sheet, the profit and loss account and the notes to the financial statements.

Please note: There is no need to list income and expense items with a zero value.

Your accounts are converted from foreign currency into Swiss francs using the closing rate method, in other words:

• for the balance sheet and foreign capital, the rate in force on the balance sheet date is applied;
• For the profit and loss account, the average exchange rate is applied, calculated on the basis of the monthly rates for the year and weighted over that period;
• for equity, the historical cost method is applied, i.e. as at the date on which the transaction took place;
• For the annex, the rates applicable to the relevant section for each item shall apply.

As these different exchange rates will inevitably result in 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?

International transactions are generally invoiced by the supplier inclusive of local VAT and are often subject to VAT reconciliation (in the context of the publication of annual accounts).

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

The company will therefore be able to use these reference rates to deduct the relevant VAT.

Recognition of foreign exchange costs

How should transactions in foreign currencies be accounted for?

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

• the payment rate, which is the rate used by banks on the date of the transaction;
• the transaction rate, which represents the exchange rate in force on the date of the transaction;
• The fixed accounting rate represents a fixed, rounded value determined by the company over a given period.

This methodology is used in particular for the accounting treatment of:

• invoices outstanding as at the transaction date;
• write-downs and bad debts;
• discounts and reductions.

Please note: Should exchange rate fluctuations deviate too significantly from the company’s fixed accounting rate, the latter should be updated during the financial year to ensure it remains representative.

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

How should exchange rate fluctuations 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 positions (same-day settlement); 
• payment transactions (same-day settlement);
• transactions that took place during the accounting period (recognised at the end of the financial year).

Within the income statement, there are three categories of exchange rate fluctuations. Exchange rate fluctuations relating specifically to securities, machinery, and the purchase and sale of goods are recognised in the opening balance.

Changes in exchange rates that are treated as financial risks are recorded in the foreign exchange gains and losses account and are therefore separated from the original account; they thus constitute financial income and expenses.

When it comes to closing accounts denominated in foreign currencies, foreign exchange risk management software will generally calculate the exchange rate difference at each closing, after converting the amounts into Swiss francs and recording them as adjusting entries (foreign exchange gains or losses).

Accounting for foreign exchange hedging instruments

How should foreign exchange hedging be accounted for?

Gains and losses on foreign exchange hedging instruments are recognised in the income statement in a manner that mirrors those of the hedged item.

Consequently, the expenses and income arising from hedging instruments will be included in the same line item or, at the very least, in the same category as those of the hedged item (operating profit or financial profit, for example).

The gains and losses on the hedging instrument must be recognised at the same time as the transaction involving the hedged item is recognised.

The recognition of option premiums, forward premiums and forward discounts on foreign exchange transactions that may arise from the use of hedging instruments is carried out as follows:

• either spread over the said coverage period (financial result);
• either on an ad hoc basis on the transaction date of the hedged item (balance sheet).

How should hedged items be accounted for on a risk basis?

The cases outlined above imply that the risk is eliminated entirely (or almost entirely) by the foreign exchange hedging instrument. Specific information relating to each transaction must therefore be included in the notes to the financial statements.

However, some foreign exchange hedging transactions may be only partial. In such cases, the residual risk component must be treated as a stand-alone open position.

In other words, changes in value must then be recorded on the balance sheet by the counterparty in suspense accounts. Whilst unrealised gains are not recognised in the profit and loss account, losses must be provided for as financial income.
Because the accounting treatment of your foreign currency invoices is a complex process in itself, it is vital to streamline your international payment operations. With this in mind, b-sharpe simplifies your foreign exchange operations for all types of foreign currency transactions.