Foreign-currency invoices: separate exchange differences from bank fees

Record the invoice with its conversion basis

A company receives a USD 1,000 invoice. For this teaching example, the valid initial accounting conversion is €0.91 per USD 1, giving:

USD 1,000 × €0.91 = €910.

Assume the full amount is recorded as a service expense and supplier payable. VAT is outside this settlement example; its determination is addressed separately below.

Keep the original USD amount, accounting date, rate, rate source and resulting €910 together. If a rate is quoted as USD per EUR instead, the calculation uses division. With an illustrative quote of USD 1.10 per EUR 1, USD 1,000 converts to €909.09, not €1,100.

Use the appropriate accounting policy and supporting rate source. The Bundesbank’s exchange-rate publications provide reference data; a reference rate is not automatically the actual rate charged by the bank.

Reconcile the later €925 bank debit

At payment, the bank’s confirmation shows:

The supplier receives the full USD 1,000 and the invoice is settled. Compared with the recorded €910 liability, the €920 settlement creates a €10 exchange loss. The remaining €5 is the separately identified fee.

The balanced settlement entry is:

The supplier balance is zero. Posting the entire €15 difference as currency loss would lose the fee distinction. Posting the fee on top of a €925 bank entry would overstate the cash outflow.

If the euro settlement had instead been €900, with the same €5 fee, the €905 total debit would comprise settlement of the €910 liability, a €10 exchange gain and €5 fee expense.

Handle a partial payment without losing the original currency

Suppose only USD 500 is paid and there have been no intervening valuation changes. Half of the original €910 payable is €455.

If delivering USD 500 costs €460 plus a €3 fee, the bank debit is €463. The settlement records €455 against the payable, €5 exchange loss and €3 fee. The remaining liability is USD 500, carried at €455 before any later required valuation.

Track both currency units and euro carrying amount. A euro remainder alone cannot show how many dollars the supplier is still owed.

Separate settlement from VAT conversion

The VAT conversion basis may differ from the bookkeeping or actual payment rate. §16(6) UStG generally provides for published monthly average rates and permits approved daily-rate treatment under its conditions.

A card statement’s conversion is therefore not a universal VAT rate. First establish whether the transaction involves domestic VAT, reverse charge, acquisition VAT or import VAT; then apply its relevant conversion and timing rules.

Also determine whether an apparent “fee” is separately charged or embedded in the exchange rate. Without a separately evidenced charge, inventing a fee split would be another unsupported estimate.

Review unpaid balances at the reporting date

An invoice remaining open at a financial year end raises a valuation question even before payment. §256a HGB governs foreign-currency translation at the closing date, with relevant differences according to remaining maturity.

That valuation changes the carrying amount used in a later settlement. Do not calculate the final exchange difference against the original invoice value if the liability has since been properly revalued.

Hans supports currency conversion and exchange differences in supported payment settlements. The reviewer should be able to follow original amount, carrying value, payment evidence, fee and remaining balance. Continue with foreign VAT and bank reconciliation.