Multi-currency accounting is the process of recording and managing transactions in foreign currencies while maintaining books in your home currency (PKR). For Pakistani businesses dealing with imports, exports, or international clients, proper multi-currency handling is essential for accurate financial reporting.

This guide explains how multi-currency accounting works, common challenges, and best practices for Pakistani businesses.

When You Need Multi-Currency Accounting

Importing goods: Paying suppliers in USD, EUR, CNY
Exporting products: Receiving payment in foreign currency
International services: Billing foreign clients
Foreign investments: Holding foreign currency accounts
International remittances: Receiving funds from abroad

Key Concepts

Functional Currency

Your primary operating currency—for Pakistani businesses, this is PKR. All financial statements are presented in functional currency.

Foreign Currency

Any currency other than PKR—USD, EUR, GBP, AED, CNY, etc.

Exchange Rate

The price of one currency in terms of another. Rates fluctuate constantly.

Exchange Gain/Loss

The difference arising from exchange rate changes between transaction date and payment date.

Recording Foreign Currency Transactions

At Transaction Date

Record the transaction in both currencies using the exchange rate on that date.

Example: Purchase goods for USD 1,000 on Jan 15
Exchange rate: 280 PKR/USD

Record:
Purchases: PKR 280,000
Accounts Payable (USD): USD 1,000 / PKR 280,000

At Payment Date

When you pay, the rate may have changed.

Payment on Feb 15 for USD 1,000
Exchange rate: 285 PKR/USD

Record:
Accounts Payable: PKR 280,000 (clear original liability)
Bank: PKR 285,000 (actual payment)
Exchange Loss: PKR 5,000 (the difference)

Exchange Gain Example

If rate was 275 at payment:
Bank: PKR 275,000
Accounts Payable: PKR 280,000
Exchange Gain: PKR 5,000

Month-End Revaluation

Outstanding foreign currency balances (receivables, payables, bank accounts) should be revalued at month-end using closing exchange rates. This ensures your balance sheet reflects current values.

Example: USD 5,000 receivable recorded at 280
Month-end rate: 282

Revaluation:
Original value: PKR 1,400,000
Current value: PKR 1,410,000
Unrealized Gain: PKR 10,000

Realized vs Unrealized Gains/Losses

Type	When	Treatment
Realized	When transaction settles (payment/receipt)	Recorded in P&L immediately
Unrealized	Month-end revaluation of open balances	May be recorded in P&L or equity depending on policy

Foreign Currency Bank Accounts

Many Pakistani banks offer foreign currency accounts. Track these in both currencies:

USD balance for actual foreign currency
PKR equivalent for financial statements
Revalue monthly to current rates

Challenges for Pakistani Businesses

1. Rupee Volatility

PKR fluctuates significantly against major currencies. This creates both risk and opportunity.

2. Multiple Rate Sources

Interbank rate, open market rate, bank’s selling/buying rate—which to use? Be consistent.

3. Timing Differences

Gap between invoice and payment can be weeks or months with significant rate changes.

4. Documentation

State Bank and tax authorities require proper documentation for foreign transactions.

Best Practices

Use consistent rate source: Pick one (SBP, your bank) and stick with it
Record at transaction date rate: Not when you receive the bill or enter data
Revalue monthly: Keep balance sheet current
Track in both currencies: Maintain foreign currency and PKR records
Separate forex P&L: Track exchange gains/losses distinctly
Consider hedging: For large exposures, forward contracts reduce risk

Multi-Currency in Software

Modern accounting software handles multi-currency automatically:

Enter transactions in any currency
Automatic conversion at specified rate
Exchange rate table maintenance
Automatic gain/loss calculation on settlement
Month-end revaluation tools
Reports in both foreign currency and PKR

Tax Implications

Exchange gains: Generally taxable as income
Exchange losses: Generally deductible as expense
Documentation: Keep bank statements, LC documents, payment receipts
Transfer pricing: Transactions with related foreign parties need arm’s length pricing

Frequently Asked Questions

Which exchange rate should I use?

Use the rate at which you can actually transact. For imports, use your bank’s selling rate for foreign currency. For exports, use the buying rate. Be consistent across similar transactions.

How do I handle advance payments in foreign currency?

Record the advance at the exchange rate on payment date. When you receive goods/services, use that same rate for the portion covered by advance. Only the balance is at current rate.

Should I revalue every day or monthly?

Monthly revaluation is sufficient for most businesses and is standard practice. Only high-volume forex traders need daily revaluation.

How do exchange gains/losses affect my taxes?

Realized exchange gains are taxable income; realized losses are deductible. Unrealized gains/losses (from revaluation) may have different treatment—consult your tax advisor for specific guidance.

Can I invoice local customers in foreign currency?

You can quote in foreign currency, but Pakistani law requires collection in PKR for domestic transactions (with some exceptions). Software should handle conversion at payment.

Conclusion

Multi-currency accounting adds complexity but is essential for businesses with foreign transactions. With proper software and consistent practices, you can accurately track foreign currency exposure and report compliant financial statements.

Need multi-currency support for your business? HysabOne handles multiple currencies with automatic conversion, gain/loss tracking, and revaluation features. Contact us on WhatsApp for a demo.

Last Updated: December 2024

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Multi-Currency Accounting: How to Handle Foreign Transactions in Your Business