foreign currency transaction gains/losses - P&L

spiky

I'm using Quicken Home & Business Version R33.7 Build 27.1.33.7 Canada Edition with Windows 10 Home. I transfer money from a CAD account to an Investment USD account. The conversion works well, but the foreign currency gain/losses does not appear on the P&L report, therefore I cannot balance the P&L report with the balance sheet. (Difference between the Equity of last year Balance Sheet and this year should equal the Overall Total on the P&L). How can I get the conversion losses appear on the P&L?

I would greatly appreciate If anyone can help me with this issue. I cannot finalized my year-end.

Micheal

Tom Young

Since I've never used Quicken's Multi-Currency function I'm only guessing what's going on here.

I assume that the currency conversion, in and of itself, is not the source of the problem.  That is, if it takes 1.25 Canadian dollars to buy 1 US dollar when you make the transfer, your net worth is unaffected.  To put some numbers on it, you'd "spend" 125 Canadian dollars to end up with 100 US dollars in the USD investment account,  but at that moment translating the US dollars back to Canadian dollars for purposes of your balance sheet you'd still show 125 Canadian dollars.

However if sometime later the conversion ratio changes and you then create a balance sheet, the 100 US dollars might show up on your Canadian balance sheet as 130 (a gain) or 120 (a loss) Canadian dollars, a change in your net worth that doesn't flow through any Income and Expense report?

If I've got that right then that's kind of a difficult nut to crack because you're not carrying a basis for your US dollars in Canadian dollars, allowing you to calculate an unrealized gain or loss with the new "quote" (in Canadian dollars) for the US dollars. 

spiky

The problem is not the currency exchange rate as such, it is that the exchange rate gain/loss does not appear the P&L. Another problem is that the realized gain/loss (and unrealized gain/loss) from investments (stock market) do not appear either. Therefore I do not balance.
Thank you for your help,
Michael

NotACPA

BUT, as @Tom Young pointed out, when you switch from CAD125 to USD100, there IS NO gain or loss.

SO, exactly what do you expect to appear on your Income/Expense report and how, exactly, would you calculate this gain or loss.  Details, please.

spiky

Say I bought $100 US dollars at 1.25 in January. So for $125 Canadian. Now for year end adjustments (May 2021) the rate must be recorded at 1.20. There is a change of $5... should it not appear somewhere on the P&L? Please note that I am a business owner and not an accountant so please bear with me.

NotACPA

BUT, I assume that you bought those USD in a cash or checking type account.  CapGains/CapLosses ONLY appear in investment type accounts.

Tom Young

"The problem is not the currency exchange rate as such, it is that the exchange rate gain/loss does not appear the P&L."

Yes, that's exactly what I said.  You end up with a change in your net worth due to changes in the exchange rate but the gain or loss doesn't flow through the Income and Expense report.  This would affect both the cash sitting in the US account and subsequent changes in the quotes for securities in the account.

Tom Young

@NotACPA

The gains and losses being discussed here are entirely due to fluctuations in currency exchange rates.  If I send $125 Canadian on the first of the month to a US account and am credited with $100 US, at that moment there's no change in my net worth.  But if at the end of the month the exchange rate moves against me such that the $100 US translates into $90 CND, I have a $35 CND loss.  That only appears on the balance sheet, there's no line item on that month's Income and Expense report that states "currency loss = $35."  (At least that's what I'm assuming is happening here.)

NotACPA

@Tom Young  I think that we're using different words to say the same thing.  While a gain/loss would exist on the Balance sheet, ONLY gain/loss transactions in an investment account appear on the P&L.

It's simply a quirk of Q.

Tom Young

NotACPA said:

It's simply a quirk of Q.

That's right, but it's a quirk that will frustrate you if you want to prove your change in equity/net worth through your P&L/I&E report.  

One approach that I thought about but didn't take the time to fully explore is to maintain your real file entirely in your home currency, even the currency you send abroad.  Then you'd also maintain a separate file with the Account (an investment Account here) in the foreign currency but translated by Quicken into your home currency.  By comparing the two Accounts you might be able to come up with some sort of "fluctuations in currency exchange rate" figure that you'd plug into your real file Account as a miscellaneous expense or income.

spiky

Yes, I am able to figure out the fluctuation through the investment income reports,( thank you) I can plug the difference into the P&L no problem but it will impact the balance sheet and I will be out of balance once again.

Tom Young

You need to employ the same sort of "magic accounting" the Quicken uses here.  If you know the foreign currency gain or loss that you want to see in your P&L* then you have a couple of ways of dealing with Quicken's "magic." 

One way would be to establish another balance sheet Account, a liability or asset as you see fit, maybe called "Foreign Currency Deferred Gains or Losses", and enter your adjusting entry in that Account with the offset to a new Foreign Currency Gain/Loss Category you create, leaving that Account off the balance sheet.

The other way is to make the adjusting entry twice in the foreign currency Account.  The first entry will increase or decrease the balance in the Account by the amount of the foreign currency gain or loss with the offset being that same Account.  That will increase/decrease the amount in the Account without affecting any Account or Category.  Then make that same entry in that Account this time decreasing/increasing the Account balance, with the offset to a newly created Category called "Foreign Currency Gains or Losses."

If my guess about what's going on here - Quicken translates the US dollar amount in the balance sheet to Canadian dollars without an offsetting Category or Account - that bit of contra magic should work.

*I wouldn't think this would be the real foreign currency gain or loss for a period, it's more of a "plug" for getting the P&L in line with the change in net worth.

spiky

Thank you for your help. I will be using your first method by leaving out the account from the balance sheet.

Micheal.