Exchange rates (FX) can be a complicated affair. This article's goal is to help you understand where FX rates are set in Projector, when items are FX'd, and the ramifications of FX. For the uninitiated, an FX rate is used to calculate the ratio at which one currency is exchanged for another. This rate is in constant flux depending on the financial markets.
Projector performs FX on expenses, but not on time cards or milestones. The reason is that Projector requires time rate cards and milestones to match the invoicing currency. Expenses however can be incurred in any currency. You'll see expenses FX'd in two place:
- From incurred currency to reimbursed currency. For example, a USA resource incurs an expense in AUD and it is FX'd to USD for reimbursement.
- From reimbursed currency to invoiced currency. For example, a GBP expense is FX'd to CAD for invoicing.
We do need to perform FX in other areas such as accounting conversions, reporting, and displaying data in Projector Web.
Specify FX Rate for Expense Entry
When your employees enter their expenses they typically expect to pay in one currency, but be reimbursed in their own currency. For example, if Sally goes on an international business trip to Canada, she will pay her expenses in CAD, but would expect to be reimbursed in her home currency of GBP. When she fills out her expense report, there are three ways the FX rate for the transaction can be calculated.
Projector FX Rates Table
This is the default FX rate Projector adopts. An administrator will maintain a table of FX rates through the Currencies and FX Rates Editor. Here they specify each currency, time frame, and FX rate that should be used. This is a manual process, so we typically see administrators using an average FX rate updated on a set schedule. For example, once a month. When a resource enters an expense the FX rate comes from this table. If the administrator has not specified an FX rate for the currency then Projector defaults to a 1:1 ratio.
As the manual process just described is likely to result in rates that are off by a bit, Projector offers a live FX rate feed from XE.com. You can enable this feed in your system settings. Their spot rate takes precedence over the Projector FX Rates just discussed and will be much more accurate on a day-to-day basis. The spot rate is useful for resources entering their expenses who do not know the specific conversion rate. This might happen if they used cash instead of credit or they spent money in a currency not covered by the FX Rates Editor. For example, if on a business trip you had a layover in Switzerland, you might incur an expense in that currency for just one evening. Instead of having to set up an entirely new currency and FX rate in Projector, you rely on the XE.com feed.
XE does not update, change, or affect the Projector FX Rates Table in any way. How come we don't use data from XE is to autopopulate the table? The reason is that XE rates are really about individuals and recompensing them for their expenses. The FX Rates Editor is at the company level and each company thinks about FX rates in a different way. Typically they create an averaged rate over a period of time and let variances up or down even themselves out. As how frequently an organization updates the table and what rate they choose is really up to their accounting department's formulas, Projector does not tie the two together.
The last way FX rates can be specified is through manual entry. This is the most accurate way for a resource to be reimbursed for their actual out-of-pocket expenses. Typically a resource will have their physical receipt and credit card statement. By entering both numbers into expense entry, the FX rate is calculated by Projector and they are reimbursed exactly what they are owed. Even though the XE.com feed is very accurate, it cannot be accurate to the penny. Manual entry does allow this level of precision.
However, if a resource can enter the FX rate manually, can't they use this to reimburse themselves for more than they deserve? To prevent users from abusing the FX conversion or from making typos you can specify a Rate Variance Threshold % on the System Settings Editor Cost Tab to flag any suspicious exchange rates. When you go to approve those expenses, anything outside the threshold will be flagged with a an upside-down cross icon.
FX Rates on Invoices
We've just discussed how FX rates come into play when a resource is entering their expenses. The choices there ensure that the resource is reimbursed for their out-of-pocket expenses. Invoicing is a different story.
On invoices, only expenses are FX'd. Time and milestones are not. Time and milestone currencies must always match the engagement currency - thus no FX is necessary.
The FX rate is locked in at the moment the expense is approved. The reason is that to keep accurate accounting, the expense must be pushed into Cost WIP. You can force a recalculation of the FX rates if you unapprove/reapprove an expense or transfer it to a project.
Because FX rates are locked in at the time of approval, we typically see organizations update their FX rates twice for each period that they track. For example, if you track your FX rates monthly you would set a spot rate on the first day of the month. Then on the last day you would look at the historical time period and enter a new, averaged rate for the month. Keep in mind that all currently approved expenses won't use this new rate for invoicing.
An invoice's currency is determined by the billed engagement's currency.
When you invoice an expense there are three amounts that come into play. Each is defined below.
- Incurred - The amount of the expense (as seen on a receipt)
- Disbursed - What your resource is recompensed (what you paid reimbursed your employee for)
- Invoiced - The amount the client is charged
When going between two amounts, an FX may occur. This can lead to a case where clients are unsatisfied with their invoices because they are not paying exactly what was incurred, even though it is in the exact same currency! In simpler terms, the receipt may say $10.05, but they are invoiced $10.10.
This occurs in a special circumstance called a double hop. To learn more about how this situation can arise, please reference the table below. Each row of the table shows the FX that occurs between each of the three amounts. The last column describes the client's perception of the FX situation.
|Incurred||FX Rates Editor, XE.com, Manual||Disbursed||FX Rates Editor||Invoiced||Hops||Explanation|
|USD||USD||USD||None||Everyone is happy because everything occurs in the same currency.|
|USD||fx||AUD||AUD||Single||The employee is happy because he gets reimbursed in full. Your company is happy because they are reimbursed in full. The client is happy because they have reimbursed the company for what its outlay was.|
This is where things get interesting. In this case the company or the client may incur a cost from the conversion process. If the two fx rates do not match the incurred/invoiced amounts won't match, even though both are in AUD! The client often notices this because they get a copy of the receipts with their invoice and the two won't match. The client may question this even though this is a normal accounting practice.
Projector can have the difference go in your company's favor or in the client's favor. Typically the cost is born by the client, but the company can choose to absorb the cost through the account setting Force equivalent FX rates when costs are incurred and invoiced in the same currency. This causes the value of the second fx to always match the first fx. This is a system wide setting, so all clients must be treated the same.
|AUD||fx||USD||fx||GBP||Double||This is very similar to the previous example, but the incurred and invoiced currencies don't match. In this case the client generally doesn't notice a problem because none of the numbers on the receipts match the invoiced amount.|
FX Rates, Invoices, and GL Transactions
The previous section talked about how FX rates come into play when including time/cost/milestones on an invoice. When you issue an invoice in a currency that differs from your accounting GL currency, then some FX work must be done. There are five different areas where FX occurs for an invoice.
|Time||When a time card is approved, we look at the time card's date. We look up that date against the FX rates defined in Projector. Finally, that value is stored in Time WIP.|
|Expense||When a cost card is approved, we look at the incurred date of the expense.|
|Milestone||Milestone FX is based on the invoice issue date|
|Taxes||Taxes are FX'd based on the invoice issue date|
|We use special FX magic to ensure applied prepayments properly balance when used for a later invoice.|
FX Rates and Reports
In the previous example we learned that Projector does not put time through an FX calculation when invoicing, however, that doesn't mean time is never FX'd. If you run a report and ask for results in a different currency than the engagement's, then Projector will use the Currencies and FX Rates Editor to convert values.