Debate on corporate Gain & loss on exchange rate?

Question

During a bank transfer in between bank accounts of different currencies, the gain or loss resulting during the transaction is taxable. Example:

1,000 USD sitting in a US account transferred into a Canadian account = 1,100

the extra $100 would be computed into the Gain/Loss account in the Earning Statement and we 'the company' would pay taxes on that $100.

Our brand new accounting system does not handle the bank transfer that way, the system ignores the $100 gain and simply registers a gain in the Unrealized gain/loss at the end of the month which is a complete different transaction for a different purpose.

I have been debating this matter with accpac for at least 6 months now.

Is my way the only way to handle the gain/loss on exchange or Provinces outside Quebec handle it a different way and that is why I can not see eye to eye with my accounting software people?

Thanks!

Answer 1

Your books need to be in all US dollars or all CDN dollars (although for tax purposes your year end statements will need to be in CDN dollars.) In your case all your accounts are in US dollars so this means your CAD Bank account needs to be in US dollars on your books as well. To do this you can create an additional balance sheet account that will act as a contra-asset (or additional asset depending on FX Rate) to the CAD Bank account. The summation of the two accounts will represent CAD Bank in US dollars.

So using your example above you would have the same entry plus an additional one (or you could have one entry if the software will allow you to change the account but I am assuming it automatically picks that Gain/loss account for you).

Bank CAD: 1,100 Debit

Gain/loss 100 credit          (I assume the software is treating this as an income statement account)

Bank US: 1,000 Credit

Gain/Loss 100 debit (the I/S account)

FX Allowance 100 credit (a balance sheet account)

After the transaction your balance sheet (for just these items) would look like:

Bank CAD:          1,100 (CDN dollars)

FX Allowance       -100

Bank CAD            1,000 (US dollars)

Answer 2

Tough to answer with limited information, but:

The gain in your example is only $100 if you bought the USD when $1US = $1CDN and converted it when $1US=$1.10CDN.  For example, if you made a sale when $1US=$1.05 CDN, collected it 30 days later when $1US=$1.08CDN, then  transferred the funds from your US to CDN account when $1US=$1.10CDN, the exchange gain would be:

On the sale - nothing, simply booked (all in $CDN) as Dr A/R $1050, CR Sales $1050

On collecting the A/R - Dr Cash $1080, Cr A/R $1050  cr exchange gain - realized - $30

On tranferring the funds  Dr Cash $20, cr realized exchange gain $20

I'm oversimplifying as you could keep the records in $US and convert everything at month-end for instance, but hopefully this points you in the right direction.

If the gains result from operating activities as in my example above they are all income in nature, fully taxable.  if they result from investing activities they could be capital gains, only half taxable.