Foreign Currency Invoices

Foreign currency invoices are supplier invoices denominated in a currency other than Australian dollars. They arise whenever a business purchases goods or services from an overseas supplier or from a local supplier who invoices in a foreign currency (most commonly USD or EUR). For AP teams, foreign currency invoices require conversion to AUD for recording in the accounting system, creating exchange rate risk and additional complexity in GST treatment for imported services.

The key decisions when processing a foreign currency invoice are: which exchange rate to use, when to apply it, and how to handle the difference between the rate used at invoice date and the rate at which the payment is actually made. These differences -- foreign exchange (FX) gains and losses -- are real financial outcomes that must be correctly recorded and reported.

Exchange rates for AP purposes

Under Australian GAAP (AASB 121, The Effects of Changes in Foreign Exchange Rates), foreign currency transactions are initially recorded at the spot exchange rate at the transaction date -- the date on which the invoice is raised or the goods are received. The ATO accepts the use of average exchange rates for tax purposes in certain circumstances, but the RBA's daily exchange rates are the reference point for ATO purposes.

When payment is made at a later date, the exchange rate at the time of payment will differ from the rate at invoice date. If the AUD has strengthened against the invoice currency, the AUD payment amount is less than the AUD liability recorded -- a foreign exchange gain. If the AUD has weakened, the payment requires more AUD -- a foreign exchange loss. Both must be recorded as FX gains or losses in the income statement, separate from the original expense.

GST on imported services

GST applies to some imported services under the reverse charge mechanism. From 1 July 2017, offshore supplies of digital products and services to Australian consumers are taxable. For business-to-business transactions, GST-registered Australian businesses are generally not required to pay GST on imported services under the reverse charge if they could have claimed a full ITC -- in effect, the import GST and the ITC cancel out. Businesses with partial ITC entitlement (such as financial services businesses or businesses with private use components) may have reverse charge GST obligations on imported services, which should be calculated and reported on the BAS.

For imported goods, GST is typically collected by customs at the border (either directly by the importer or via the low-value import threshold rules that apply from 1 July 2018 for goods valued under AU$1,000). The import GST amount shown on the customs entry document is the ITC claimable on the BAS, provided the business holds a valid customs document confirming GST was paid at the border.

Managing FX risk in AP

Businesses with significant foreign currency supplier spend can reduce FX risk through forward contracts -- agreements to exchange currency at a predetermined rate at a future date -- or by maintaining foreign currency bank accounts to receive and make foreign currency payments without repeated conversion. The AP team's role in FX management is to ensure that the accounting system records invoices at the correct invoice-date rate, payments at the correct payment-date rate, and that the difference is recognised as an FX gain or loss rather than adjusted against the original expense account.