How Foreign Currency Gains and Losses Work In Xero

Tony Crivelli
November 22, 2022

As the global economy is one of its most volatile states since the 2008 financial crisis, businesses are understandably looking to get smarter, more predictable figures to lock in when it comes to costs, savings and spends, including international invoices. 

While exchange rates continue to move on a near day-to-day basis as various currencies get weaker and stronger, it’s getting harder for small businesses to realise their foreign gains and losses and therefore, know how they’re performing. 

Xero offers plenty of reports to help view the changing foreign exchange rates and their impact on foreign costs, however there are more intelligent add-on tools available that provide a better view, understanding and knowing on this. 

How Xero works with international costs 

Xero offers multiple currency accounts and reporting on its premium plans and uses to inform the exchange rates on an hourly basis. This means that your reports will always reflect the latest figures when you run them, including when a new invoice is created. The value of the invoice itself continues to change too, until it is paid when the unrealised gain or loss is calculated and shown. 

Of course, Xero can only use XE’s numbers and values as a guide and so upon payment and reconciliation, the platform also employs bank revaluation and feeds this into your account automatically. 

Xero’s reports for international gains and losses 

The two most common reports used to look at international transactions are the Income Statement and Balance Sheet, which always look at the local currency or base currency of your account. 

The Income Statement uses three systems accounts that are directly related to foreign currency; unrealised currency gains, realised currency gains and bank revaluations. The first, unrealised currency gains, will continue to change even if no new transactions are made, and the second, realised gains, will only change when international invoices have been finalised.

Xero’s tip is to ensure that the report is run the day after a business’ month end to capture the finalised rates and values. 

Xero also offers a Foreign Currency Gains and Losses Report, which sets out accounts payable, account receivable and the balances in the various foreign currencies and the business’ base currency. While it also shows the realised and unrealised gains for the report period and year to date, it also lists the total gains and losses under the ‘FX exposure’ column, which again uses XE rates at the time. 

What’s missing in Xero for realised foreign gains and losses?

As a self-accounting and foreign invoice tool, Xero offers a great starting point for SMEs. The simultaneous view of base currency, alongside multiple foreign currencies and their values is incredibly useful to avoid a manual cross-check each time. In addition, it’s arguably also very valuable that the realised gains are only calculated after the transaction is made and accounts for bank revaluation are included as these are points that can often be forgotten about when it comes to the value of international bills. 

There are, however, various aspects within Xero that are missing to help SMEs better plan and therefore know their balance sheets and currency gains sooner. 

While the use and continued update of the XE rate maintains values in real-time, it could encourage the habit of chasing the rate and trying to time the market which isn’t a valuable or productive use of time. Having the value of the invoice continually changing also means that business owners aren’t able to set solid cost and profit figures to enable better strategy and planning ahead, and must rely on running a report after month end to know their final numbers. 

Xero accounting for bank revaluation highlights the fact that the XE rate displayed won’t be the one used when it comes to the transaction. Ultimately, it comes down to the bank’s own currency rates, which for various reasons aren’t shown and herein is another element of mystery. 

Finally, there is a lack of choice in securing the best rate for the business as the default goes to the bank’s, despite plenty of useful invoice data that would help to achieve a more favourable rate and cost. 

In this current climate, businesses are needing certainty on their costs more than ever and smart tools that enable this. 

Fluenccy: the Xero add-on for foreign currency gains

Fluenccy is integrated with Xero to enable SMEs to have a better understanding of their international costs, and to achieve more consistent, predictable figures for greater planning and strategy. 

Xero’s reports offer a siloed foreign currency performance view within a business, that while informs necessary accounting figures, doesn’t provide much in the way of knowing industry performance, the potential for improvement and proactive planning. 

Fluenccy’s Currency Score takes the relevant data from foreign invoices across the past 12 months to give a view of a business’ performance against the industry benchmark. Taken into account are invoice costs each month, invoice trends, payment dates and exchange rates providing a personalised assessment in under 5 minutes, which is in the context of the industry and wider economy. The currency score number is the indicator of performance and improvement. 

Using this new data, the platform also provides greater forward thinking capabilities for SMEs through Fluenccy’s Invoice Manager, which syncs with upcoming international invoices. Unlike Xero’s reports, Fluenccy provides insights that enable strategy; cost at raise, current local price and the potential future price. Armed with this knowledge and data, SMEs can set up AI-powered currency plans along with automated international payments that ensure they are paying the cost amounts they’ve agreed to and at the best rate. 

With Fluenccy, there is no retrospective report running to know final costs or a changing invoice figure to guestimate values. The platform uses personalised data to inform understanding and allow for full visibility, and utilises AI and different providers to reach better, more consistent rates that feed into a considered currency plan and international invoice strategy for the business. It provides the certainty that SMEs the world over are needing right now. 

Start with a free trial today here.

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