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Exchange rate on credit note for foreign currency invoice

#1

Hello,

Is there a way to set the exchange rate to use for a credit note created from a foreign currency invoice?

I think this could be important. Consider the following situation:

  1. Raise an invoice for 100 EUR on 01/05/2019. This gets created with an exchange rate from GBP of 1.1626, and a debit shows up in the Debtors Control Account for £86.01.
  2. Now later, say on 09/05/2019, for whatever reason, a credit note needs to be issued to this client for the full amount of the invoice. Creating a credit note from the invoice on this date, the exchange rate isn’t shown, but it uses the exchange rate of 1.1620, and a credit of £86.06 shows up in the Debtors Control Account.

This means that while the invoice in EUR is credited in full, the Debtors Control Account is now 5p in credit. While small in this case, it is not right because the only way to clear this is to journal it to somewhere (i.e. Currency Charges), which clearly isn’t appropriate as (in this case) the invoice was never paid in the first place so there can’t be a gain on it.

I could of course create the credit note on the same day as the invoice, but that’s not what happened so could confuse the records. If I actually send a credit note to the client it should be dated on the day that it was sent.

If it was possible to just alter the exchange rate on the credit note (like you can on an invoice) to match that used for the original invoice then then this wouldn’t be a problem, but I can’t see a way to do this. Am I missing something? In fact, the credit note should probably default to the same exchange rate as the invoice that it was created from.

Note that in the example above, the credit note was for the full amount of the invoice, but the same situation would occur if it was only for part of the invoice.

The situation is even more complex in the case where an invoice was paid, and then refunded at a later date. In this case there would likely be a genuine gain or loss between the two transactions, which should ideally be handled by the credit note automatically rather than needing a manual adjustment from the Debtors Control Account (which would easily be forgotten). Again, this would be simple if the credit note used the same exchange rate as the day of the invoice.

#2

Hi @zelanix

I’ve queried this with our development team, and there is an issue here with the exchange being used.

I have asked for this to be reviewed and will update you in due-course.

#4

Hi @zelanix

We released a fix for this yesterday which means the credit note would pick up the original exchange rate.

When you have a chance, would you mind testing and confirming this now works all OK please?

#5

Hi Mathew,

Many thanks for your quick response to this issue.

I think that the behaviour for unpaid invoices is now correct.

However, I’m not convinced that the behaviour when crediting paid invoices is quite right (i.e. refunding a sale). Again, consider the following:

  1. Raise an invoice for 100 EUR on 01/05/2019. This gets created with an exchange rate from GBP of 1.1626, and a debit shows up in the Debtors Control Account (and a credit in General Sales) for £86.01.
  2. Log a payment for the the full amount of the invoice on 02/05/2019. Due to a movement in the exchange rate (now 1.1654), £85.81 is received. This is credited to the Debtors Control account, and a 20p loss is recognised as a Currency Loss. So far so good.
  3. Now, on 08/05/2019 we refund this client, so a credit note is raised for the full amount of 100 EUR. The exchange rate is now 1.1678, i.e. £85.63. The credit note and payment both show up in the Debtors Control Account at £85.63, and the credit note shows up in General Sales as a £85.63 debit (38p less than the original invoice value in GBP).

The General Sales account is therefore 38p in credit due to the exchange rate movement. Should this not be treated (automatically) as a Currency Gain?. So the credit note should always be for the amount of the invoice in local currency, and any difference in the amount paid out is treated as a Currency Gain/Loss. In the same way that the difference between when the invoice was raised and paid was handled.

I’m not 100% sure of the correct treatment of this situation, but it doesn’t seem right how it is now (although I accept that in most cases the amounts are probably relatively small).

Another variant of step 3 above is as follows:

  1. Create a credit note for the invoice on 08/05/2019 for the full amount of 100 EUR. The exchange rate is now 1.1678, i.e. £85.63, but the exchange rate we get from the bank means that we actually have to pay £86.63 for the client to get 100 EUR. In this case, the £1.00 difference from the actual exchange rate should also be treated as a Currency Loss, in the same way as if it were a payment to a supplier.

Having said that, I’m satisfied that the original issue has been fixed, so thanks again for that. Up to you whether you want to look into the items above, I just noticed them when I was investigating this.

As a final point, I think that the behaviour if the balance from the credit note is credited to the client account instead of being refunded is basically spot on, with the Currency Gain/Loss recognised automatically and associated with the credit note based on the exchange rate on the day that it is created (except that, as above, I think the GBP value of the credit note should use the same exchange rate as the original invoice, with the difference to the date of the credit note recognised). I would basically like to see the same similar behaviour when the credit note is created and refunded.

#6

Hi @zelanix

Thanks for confirming.

I have deferred your comments to our development team to take a look. If anything isn’t working as intended, we will of course fix this.

#7

Hi Mathew,

Thanks for this - should we leave this topic open for any updates?

#8

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