Foreign-Currency Accounting and Exchange Differences

Invoicing in euros, collecting in dollars, paying suppliers in various currencies: for many Swiss companies this is the norm. But the accounts and the financial statements speak a single monetary language, and exchange-rate fluctuations generate differences that must be recorded methodically. Managing them well avoids both surprises in the year’s result and tax disputes.

The accounting currency

The Code of Obligations provides that the accounts be kept in the national currency, the CHF, or in the functional currency relevant to the business (for example the euro), if this is the company’s main currency. In the latter case, however, the figures must nonetheless also be stated in CHF in the financial statements, with the conversion rates mentioned.

For the vast majority of SMEs the accounting currency remains the franc: foreign-currency transactions must therefore be converted into CHF.

Converting transactions

Every foreign-currency transaction is converted into CHF at the spot rate on the transaction date:

a sales invoice in euros is recorded at the EUR/CHF rate on the invoice date;
a purchase in dollars is converted at the spot rate on the document date;
in practice the daily reference rates are often used, or periodic average rates when volumes are high and fluctuations contained.

From here arises the first type of difference: between the moment the receivable or payable is recorded and the moment it is collected or paid, the exchange rate may have changed.

Realised and unrealised differences

Two situations must be distinguished:

Realised exchange differences: they arise when a foreign-currency receivable or payable is actually collected or paid at an exchange rate different from the one recorded. They flow into the income statement as a foreign-exchange gain or loss and contribute to taxable profit.
Unrealised exchange differences: they arise at year-end from the remeasurement of foreign-currency receivables, payables and cash at the closing rates, without any collection or payment having taken place.

Year-end valuation

At closing, foreign-currency items must be adjusted to the year-end rate. The Federal Tax Administration publishes reference rates (year-end and average) that are commonly used.

The prudence principle of the CO governs the treatment of unrealised differences:

unrealised exchange losses must as a rule be recognised (prudence);
unrealised gains may be recognised, but with the caution dictated by the prudence principle; in practice, consistent criteria that remain constant over time are adopted.

The important thing is to apply a uniform method year after year, without steering the result by choosing differently each time.

Practical aspects and VAT

VAT accounting has its own conversion rules: for taxable transactions the rates admitted by the Administration apply, and the VAT return follows its own procedures.
It is advisable to keep a record of the rates used and their source, so as to justify the conversions.
A dedicated exchange-difference account makes the currency impact on the result easy to read.

Common mistakes

Converting everything at a single “convenient” rate rather than at the spot rate of the individual transaction.
Failing to remeasure foreign-currency items at year-end, leaving misaligned values.
Confusing realised and unrealised differences, with imprecise tax effects.
Changing the valuation method from one year to the next without consistency.

In summary

The accounts are kept in CHF (or in the functional currency, with the figures also stated in CHF).
Transactions are converted at the spot rate.
Realised differences go to the income statement; year-end ones arise from remeasurement at the closing rates.
The prudence principle guides the treatment of unrealised differences.

How we help you

We set up multi-currency accounting, the correct conversion of transactions and the year-end valuation of foreign-currency items, with a treatment of exchange differences consistent with the CO and the VAT rules. We manage your foreign-currency accounting.