Hello,
My company is implementing a new ERP and a third-party company is helping us with the implementation of it.
As per cloud computing accounting a portion of this implementation services can be capitalized as an intangible asset and a portion has to be expensed. This third party is billing in foreign currency (TC) which is different from our Local Currency (LC which is also our functional and presentation currency)
My question is about realized and unrealized exchange gain and losses when clearing an accrual account.
In period 1 , we booked a manual accrual for services provided during the period. Then in period 2, the Purchase order was created in the system and the reception of the service was processed.
Ideally no manual accrual would have been needed but Purchase Order (PO) and reception were not timely approved and company guidance is to have POs for all expenses.
To avoid duplication of cost, manual accrual in period 1 needs to be reversed and in order to clear the accrual account I need to bring the difference (LC 80) resulting from different exchange rates to exchange gain and losses. My question is : when you clear an accrual account is the difference booked in real or unrealized gain and losses?
Invoice will be booked at a future stage as well as payments.
Period 1 Accrual ( Manual)
Account name Category TC LC Exchange Rate
Dt Consulting services Expense 100 110 1,1
Dt Intangible asset Asset 100 110 1,1
Ct Accrual Liability -200 -220 1,1
Period 2 Receipt of implementation of services (PO)
Dt Consulting services Expense 100 150 1,5
Dt Intangible asset Asset 100 150 1,5
CT unbilled PO Liability -200 -300 1,5
Period 2 Reversal of the accrual
Dt Accrual Liability 200 300 1,5
Ct Consulting services Expense -100 -150 1,5
Ct Intangible asset Asset -100 -150 1,5
Total Accrual account 0TC 80LC Realized or Unrealized?
Unrealized and realized exchange gain/loss
Re: Unrealized and realized exchange gain/loss
In principle, all exchange gains and losses arising on this liability should be expensed in P/L. An invoice that comes after a recognised accrual doesn't create a new liability. All foreign exchange gains or losses during the time from the accrual to the invoice issuance should be considered an expense/income IMO. See also this illustrative example: https://ifrscommunity.com/knowledge-bas ... ifferences
Re: Unrealized and realized exchange gain/loss
Thank You Marek. Actually, thinking further this is just the revaluation of an accrual(same amount in transactional currency but different one in Local one due to FX) and so it should be booked as Unrealized right?
Thanks
Thanks
Re: Unrealized and realized exchange gain/loss
I'd consider it unrealised until the invoice is paid.