Managing and accounting for international transactions can be complex. Not only do you need to accurately manage multiple currencies, but you need to ensure that everything you do complies with international tax laws and best practices.
Thankfully, QuickBooks can simplify international transactions through its Multicurrency feature. Still, making the most of this means you’ll need to understand the key features, and how best to use them to ensure compliance.
The Basics of International Transactions in QuickBooks
International transactions in QuickBooks are best handled through the Multicurrency feature. This requires setting up your home currency for your region, and then adding additional currencies, for the countries with which you do business.
In a nutshell, Multicurrency allows you to make and receive payments in foreign currencies, for customers and vendors. You can also do bank reconciliation, reporting, and gain and loss tracking in multiple currencies. All you need to do is create a new account for each currency.
A huge benefit of QuickBooks Multicurrency is that you can choose to sync transactions from across the globe to a single bank account, or assign a separate bank account for each currency, for easier tracking and transaction breakdowns. It’s also possible to categorize income and expenses by currency, and create financial reports to accurately reflect your activities.
However, to begin with, you’ll need to set up and configure your software correctly.
Setting up
Begin by selecting your home currency. Usually, QuickBooks will automatically set it, but this can be changed under advanced settings, in the ‘currency’ section.
Next, you’ll need to add the various currencies you use for international transactions. With the Multicurrency feature on, go back to the ‘currency’ setting and select ‘add new currency’. Don’t panic if you make a mistake or add the wrong currency, as these can be deleted, provided that they don’t have any linked transactions.
Then, it’s time to add a new account to your chart of accounts for foreign banks or credit cards. Remember to select the right currency and start date for these accounts, for accurate reporting. After all, once an account has been assigned a specific currency, you won’t be able to change it.
If you already have connected foreign banks, you can add transactions in those currencies. To do this, go to ‘bank transactions’, and open the ‘for review’ tab. Select the relevant transaction details, and click ‘add’. In the currency field, fill in the amount or exchange rate provided by your bank. Once this is done, QuickBooks automatically updates currency values every four hours.
Managing Multi-Currency Transactions
It’s important to remember that once you’ve enabled the Multicurrency feature, you can’t reverse it. This is because it essentially changes how your financial data is presented, by factoring in foreign currencies for different accounts, customers, or vendors.
As such, you’ll need to ensure that your finance team follows best practices when recording international transactions in QuickBooks. This includes accurate data entry, especially for exchange rates.
One way to ensure this is through providing training to your finance department.
Don’t forget to consult with your CPA, as it’s vital to abide by any regulations surrounding international transactions, such as tax liability.
Ensuring accurate currency conversion and exchange rates
While QuickBooks automatically updates exchange rates, it’s possible to manually enter rates to this information to reflect real-time rates. Also remember that if you are dealing with historical transactions, you’ll need to double-check that the exchange rates match the transaction dates for accurate reporting.
One way to simplify this is to set up and customize exchange rate alerts. For example, you can create an automated alert to notify you when an exchange rate reaches a specific threshold.
Handling gains and losses from currency fluctuations
Changes in exchange rates over time could result in currency gains or losses during international transactions. This, in turn, can affect your financial reporting and analysis.
Note that these kinds of gains or losses can be considered unrealized, or realized. The former occurs ‘on paper’, while the latter refers to the actual gains or losses documented once a transaction is complete, and the money has been paid or received.
Naturally, this affects your accounts receivable and accounts payable. Basically, QuickBooks shows unrealized gains or losses on your AR and AP, without affecting your general ledger or trial balance. However, these gains and losses are realized on your bank accounts, and reflected on your profit and loss report, balance sheet, and cash flow statement.
To avoid gains or losses, make sure that the exchange rate used is the same as the invoice and payment transaction. This may require you to open payment transactions and edit the exchange rates to match.
International Tax Compliance
Tax compliance is one of the biggest challenges surrounding international transactions. After all, different countries levy different taxes at different rates. Thankfully, QuickBooks’ Multicurrency feature allows you to set up different tax codes for each country that you operate in. QuickBooks offers a list of commonly used rates, but they’re mainly for informational purposes. If you’re unsure, it’s best to consult with your CPA for the correct rates for different international taxes.
You can also add the rates manually. To do so, go to the ‘VAT’ settings and select ‘set up’. Then, fill out the details of your tax agency, which will allow you to access the Tax Center. Once here, you can select the type of tax rate you want to set up, enter the relevant details, and select Save.
While we’re on the subject of taxes, don’t forget about import and export duties. Thankfully, QuickBooks can track these so that you can account for any costs or potential rebates.
Strategies for managing tax requirements and ensuring compliance
To simplify managing international tax compliance, we recommend creating a list of tax agencies that correspond to the tax authorities of each country you work in. This can help you organize your payments and liabilities effectively, and will help you keep up to date with any changes in tax rates or laws.
Also make sure that you’re fully aware of any tax treaties or double taxation agreements between the US and the countries to which you provide goods or services. These are in place to avoid being taxed twice on the same transactions.
We also advise running regular tax reports for each country. That way, you’ll have access to comprehensive documentation to prove compliance, which is especially helpful if you are ever audited.
Advanced Reporting for International Finance
QuickBooks Advanced Reporting lets your team create custom reports. In this instance, they can be used to analyze your financial data across different currencies. That way, you can monitor your business’ performance, identify trends, and easily benchmark and compare data across different time periods and currencies. Financial analysis also helps with tax planning.
This can be done using existing templates, or by editing them with the report library customization tools. You can even set up automated reporting workflows for a smoother process.
Custom reports can also be tailored for your international stakeholders. QuickBooks provides a range of reports to analyze operations like sales, profitability, inventory valuation, and even payroll summaries. As such, your business can track and share the specific metrics that allow for strategic decision-making and performance assessment.
Integration and Automation for Global Operations
QuickBooks offers a number of integration capabilities, to further streamline international transactions. This includes connections with international banking platforms, and allowing for automation of international payments.
In fact, QuickBooks currently supports banking integration in 43 countries, over a huge range of institutions. This allows you to easily track and manage transactions across different countries.
Several companies also offer ERP integrations with QuickBooks, to automate payments to suppliers, independent contractors, and staff across the globe.
These kinds of integrations can help you achieve greater efficiency, reduce errors, and ensure compliance in all your international transactions.
Risk Management in International Transactions
Unfortunately, international transactions aren’t without risk. Foreign exchange risks can be broken down into three main categories. These are:
- Transactional risks, such as when the exchange rate changes between an agreement date and the payment date.
- Operational risks, in which exchange fluctuations directly affect your future cash flow.
- Accounting (translational) risks, like when you need to convert foreign assets and liabilities into your home currency for reporting purposes.
One way to offset these risks is through hedging. This entails making strategic investments to offset your currency risk, as a kind of insurance policy. For example, you could use forward contracts, which establish an agreed-upon price and exchange rate for your goods or services over a specific time period. However, the downside of this is that if the exchange rate changes to be in your favor, you forfeit any currency gains.
Alternatively, your team can set up a payment policy which is effective as soon as a contract is signed, so that you can ensure the exact amount (and exchange rate) to avoid currency losses.
In addition, consider implementing internal procedures and controls. For example, ensure that your team is up to date with QuickBooks functionality and uses only accurate and real-time data. If your team struggles with this, consider outsourcing these tasks to a specialist.
Strategies to prevent fraud
Fraud is a growing problem facing companies making international transactions. While QuickBooks can integrate with various risk-management tools to prevent unauthorized transactions and comes with strict data security, your team still needs to be proactive.
For example, they should use strong passwords, double-factor authentication, and regularly monitor all transactions for any suspicious activity.
Overcoming Challenges in International Financial Management
A crucial aspect of QuickBooks Multicurrency is the proper management of exchange rates. This allows you to minimize the impact of currency losses, and steady your cash flow.
Another vital component of effective financial management on a global scale is to leverage expert advice and support.
Fusion CPA’s team of outsourced controllers can step in to help you with your day-to-day QuickBooks accounting, including international transactions. We can also train your team to handle such transactions, and provide guidance on navigating the complexities of international taxes and reporting requirements. Our CPAs are here to assist your business with strategic financial planning for financial analysis, growth and success.
For help navigating international transactions, schedule a Discovery Call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.