Unpaid factory invoices: year-end exchange rates
Yes. If sterling is your functional currency, unpaid USD or CNY factory invoices recognised as monetary trade creditors must be translated at the year-end closing rate. Exchange differences generally go through profit or loss, even before payment. For supplier document support, contact Cambridge China Bridge.
Identify the outstanding trade creditor
HMRC’s accounting guidance says monetary items, including trade creditors, outstanding at the balance sheet date are translated at the closing rate. For an ordinary factory invoice payable in dollars or renminbi, review the unpaid foreign-currency balance, including any balance left after a part-payment.
Start with invoices already recognised in your accounts. Reconcile them against supplier statements, payments and credit notes. Flag pro forma invoices, advance payments and disputed balances for your accountant rather than treating every supplier document as an outstanding creditor. For initial recording, see foreign currency supplier invoices.
Use the closing rate for your accounting date
The closing rate is broadly the exchange rate in force on the last day of the accounting period. For the outstanding monetary creditor, use that rate rather than retaining the original transaction rate or substituting a purchasing budget rate.
This guide assumes sterling is your functional currency. Foreign-currency transactions are first translated into functional currency; presenting accounts in sterling does not by itself establish that sterling is the functional currency. Ask your accountant to confirm the currency and closing-rate source, and retain the dated rate record.
Calculate and record the exchange difference
Convert the outstanding foreign-currency amount at the closing rate and compare it with the carrying amount for that same balance. If the sterling liability increases, the movement is an exchange loss; if it decreases, it is an exchange gain. Keep a schedule showing the foreign amount, existing carrying amount, closing rate and adjustment.
HMRC says exchange differences on monetary items generally enter profit or loss, including unsettled items. Waiting until the factory is paid is therefore insufficient. If you have a currency hedge, ask your accountant to check its treatment separately. For purchasing plans, use exchange-rate risk budgeting.
Keep the payable separate from stock valuation
Retranslating the creditor does not mean retranslating historical-cost stock at the same closing rate. HMRC distinguishes monetary balances from non-monetary items measured at cost, which use the transaction-date exchange rate. For the wider stock review, see valuing unsold imported stock.
Give your accountant a reconciled invoice list, supplier statements, payment records, credit notes and the closing-rate calculation. Ask Cambridge China Bridge for help obtaining factory-side documents where needed. Resolve missing credits and unmatched payments before finalising the reconciliation.
Frequently asked questions
Must I retranslate an invoice that is not yet due?
Yes, if it is a recognised foreign-currency monetary trade creditor outstanding at year end. HMRC’s rule concerns the outstanding balance, rather than whether payment is overdue.
What if I have already paid part of the factory invoice?
Reconcile the payment first, then retranslate the remaining recognised foreign-currency creditor at the closing rate. Check that your schedule and supplier statement agree.
Can I wait until payment to recognise the exchange loss?
Generally, no. HMRC says profit or loss includes exchange differences on unsettled monetary items as well as settled transactions.
Does the year-end adjustment change the amount owed to the factory?
The calculation changes the accounting value of the outstanding foreign-currency balance. Keep the supplier’s currency amount separate from its translated sterling carrying amount.