This article is relevant if you are using NetSuite to perform foreign currency accounting.
NetSuite Foreign Currency Accounting Basics
NetSuite does a good job incorporating foreign currency accounting into its financial platform. ¬†The good news is that you do not need NetSuite’s One World application and all organizations using NetSuite can activate foreign currency features without additional license fees (subject to NetSuite’s discretion) . ¬†Simply activate the feature under Setup, Company, ¬†Enable Features, Company, International, Multiple Currencies.
To setup NetSuite foreign currency, configure a few structures:
- Activate the currencies you will be using under Lists, Accounting, Currencies. ¬† All ISO supported currencies are candidate. ¬†Activate the “Update Time Zone” feature if you would like NetSuite to keep your daily exchange rates fresh (generally a good option — but may not be satisfactory if you have different sources for your exchange rates).
- NetSuite does not yet natively handle alternative virtual currencies, such as Bitcoin. ¬†Although that should be changing soon. ¬†Ask me if you are interested.
- Generally, if you are going to work with foreign currencies frequently, you should setup a bank account that is denominated in your target foreign currency. ¬†This will help you maintain balances to both receive and send currencies at low cost. ¬†Bank accounts are effectively depositories for cash as commodity. ¬†Each account is a repository for holding a particular type of government fiat currency.
With these structures setup, you are ready to go to work with foreign currency.
Multi-Currency Customers and Vendors
Transaction Management Considerations
A particular area to pay attention to is how you setup transactions when working in foreign currency. ¬†I recommend that you setup your transactions in the currency that you intend to settle in. ¬†For example, if you are a US based company but you are selling to a customer in Germany, determine the following:
- Talk with the German customer to determine what currency will you settle the transaction. ¬†USD or EUR?
- Use that currency to setup your Sales Order transaction for future payment remittance.
- You may agree to a different price (in foreign currency) for the good. ¬†If so, use the ¬†price you agreed to.
- You may not agree with the provided exchange rate. ¬†Change the transaction exchange rate to fit your¬†interpretation¬†of the real world.
- Now process the order as normal. ¬†The currency exchange rate on the Sales Order will stay in effect through the life of the transaction. ¬†This makes sense because this is the rate for which you and your customer have agreed.
- NetSuite will automatically handle foreign currency gains and losses as time moves into the future and you account for currency holdings. ¬†Foriegn currency gains and losses are the subject of a different article.
What if you accept foreign currency to settle a local currency obligation?
You may, however, have a different situation. ¬†You may sell a good in one currency, such as your base currency, but you are willing to accept a different currency to settle the obligation. ¬†This is possible to do but there is a NetSuite concern to be aware of. ¬†NetSuite will allow you to accept payments and create customer deposits in a foreign currency. ¬†However, it will not let you apply these payments of deposits (effectively credits) to open invoices denominated in the base currency. ¬†Even if you establish the exchange rate that effectively satisfies¬†¬†the obligation perfectly, the system does not allow you to settle the transaction in the normal fashion.
This means you will be carrying around open invoices and unapplied credits (payments or deposits). When looking at the customer open receivable balance (including deposits), you may see the customer has satisfied the obligation as it nets to zero. ¬†But the underlying transactions will remain open.
A number of NetSuite customers have voted for an enhancement (# 112956)¬†as it can come up in a multi-company context or when working frequently with foreign currency.
The topic of foreign currency can be complex and confusing. ¬†NetSuite manages foreign currency accounting well; yet, as you work to keep your ledgers reconciled, it is¬†important¬†to understand some of the areas that may get you into an accounting / transaction puzzle.
If you have any questions about foreign currency, or you would like help optimizing your NetSuite system, contact-us or comment below.