What are the functional and presentation currencies that should be supported by the accounting system?


The difference between accounting and taxation

Since July 2015, domestic transactions in Indonesia have been mandated by the Central Bank of Indonesia? (BI) to be conducted on a basic rupiah basis.

However, according to the treasurer of the customer in Bandung who I visited the other day, it is allowed to do transactions with certain customers in dollar basis exceptionally by applying to BI and getting the permission, so I went to BI in Jakarta for this application.

However, this is a gray matter, and the basic policy of BI does not change, and there are some restrictions on the size and volume of transactions of the company and its clients.

However, in terms of taxation, there is a rule that if a company is allowed to report in dollar basis at the Indonesian tax office (Kantor Pajak), it must continue to report in dollar basis for 5 years, so for example, a company that started accounting in January 2011 will be required to report in dollar basis until the end of the 5th period at the end of December 2016.

In other words, there is a temperature difference between the BI-driven trend of rupiah-based accounting and the tax department's policy, and what will be a problem at this time is that even if the accounting system is changed to rupiah-based from January 2016, dollar-based financial statements and tax reports will be required for one year.

The base currency for this accounting is the functional currency (Base currency or Functional currency), and the currency for reporting to the tax office is called the presentation currency.

Foreign exchange differences arising from foreign currency transactions

The need to convert to the presentation currency base to meet the reporting obligation to the tax office for one year means that there will be three foreign currency conversion flows in accounting operations: foreign currency - functional currency - presentation currency.

  1. From foreign currencies to functional currencies (no difference due to the use of transaction rates)
  2. Foreign exchange gains and losses at the time of settlement of receivables and payables (difference between the accrual rate and the settlement date rate)
  3. Foreign exchange revaluation (difference between assets and liabilities at the end of the month)
  4. Change from functional currency to indicated currency (asset and liability items are translated at the end of the month)

The foreign exchange gain or loss from the revaluation of debt A/P at the end of the month rate is called Forex Gain-Unrealized, because the unrealized gain represents the "unrealized gain" and is only the potential (valuation) gain at a certain point in time.

On the other hand, foreign exchange gains and losses at the time of debt A/P settlement are distinguished as "Forex Gain-Realized", and it is necessary to clarify what is caused by the foreign exchange gains and losses (from which invoices and journal entries), which are determined by settlement and conversion (if dollar basis, dollar conversion).

However, if the rate at the end of the previous month is used as the flat rate for trading, the rate at the time of A/P settlement is already the rate at the end of the previous month, so no realized profit will be generated.

Timing of the conversion to the denominator currency base

The purpose of converting functional currency rupiah-based financial statements to presentation currency dollar-based financial statements is either for tax reporting, as described above, or for the preparation of consolidated financial statements (consolidated financial statement).

If the system has multiple functional currencies, it will generate a multi-functional currency-based journal entry for each trade entry, but the conversion to the display currency will be done in a month-end (or year-end) batch process and the conversion rate will be either the historical rate, the last rate, or the average rate.

  1. Multi-functional currency system (trading rates)
    Trading Currency (Yen)
    ├ Functional currency (rupiah)
    └ Functional currency (dollar)
  2. Conversion to the denominator currency in a single functional currency system (year-end rate)
    Trading Currency (Yen) - Functional Currency (Rupiah) - Display Currency (Dollar)

However, the foreign exchange valuation gains and losses at the time of settlement and the foreign exchange revaluation at the end of the month mentioned above are the result of adjusting the impact of the foreign currency, the yen, on the rupiah, and are meaningless against the dollar, which is the denominator currency.

Therefore, it is very difficult to implement the accurate conversion to the displayed currency in the batch processing at the end of the month, and this is the difference between the multi-functional currency support system described above.