An advance in a foreign currency, in most cases, represents a sum of money paid to suppliers or money received from customers. The issuance of the proforma invoice – as a request for its payment – should not be accounted for until it is paid. It is accounted for only after the money has been either credited or debited from the bank account or after a movement at the cash register.
The fact that the foreign currency advance will most likely not be refunded is very important while deciding whether or not to perform an exchange rate conversion whereas a proper performance from both parties is expected. There is no cash flow expected from provided advances – the advance payment from the bank account or the cash register has been made and the return is usually not expected, therefore the exchange rate risk is not taken into account in this situation. On the other hand, a receivable as an expectation of payment and future cash flows in a foreign currency, is converted. In case the advance becomes receivable, the cash income is expected, and a foreign currency receivable is also associated with exchange rate risk. Therefore, its balance should be recalculated according to the current exchange rate.
The ambition of the Czech National Accounting Council is to eliminate partial inconsistencies in the law as well as regulations related to the law by issuing its own interpretations. Interpretation I-43 was issued in October 2020 and aims to establish a sufficient accounting treatment for the showing of advances provided in a foreign currency in the financial statements.
The interpretation distinguishes whether the provided advance is part of the total acquisition price of the property (service) or if it is receivable.
If delivery of the subjected item of the contract is expected, in accounting, the advance provided is the result of payment of the acquisition price of the property or service before their actual delivery. It basically represents a separate part of the total acquisition price of the purchased property or service and is accounted for as follows:
For those advances provided which are not expected to be recovered and at which the exchange differences from the conversion is reported, according to the rationale of the Interpretation, “this can be considered as a procedure that is in conflict with reflecting a true and fair view of the financial position of the entity in the financial statements”.
If there is a probability that property or service will not be delivered and therefore a refund is expected, the advance provided is a foreign currency receivable and the procedure is as follows:
In conclusion, it can be stated that the perception of provided advances in the context of the future income and the associated showing and converting of those advances lead us to true and fair views of the company’s financial situation when preparing financial statements.
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