Transactions in foreign currency
should be booked at market rate

There is no official reference for actual exchange value

Businesses are required to record transactions in foreign currencies carried out in 2021 at the actual market exchange rate of the lira at the time of the operation, according to a decision by the Ministry of Finance (MoF).

Up till now, firms were recording transactions at the official exchange rate (around LL1,507/USD). The differences between the official rate and the market rate were recorded either as expense or revenue.

The decision applies to cash transfers, inventories, revenues, expenses, and purchases, in addition to acquisitions of fixed assets. It stipulates that the actual value of fixed assets at the real exchange rate must be used for closing the accounts at the end of the fiscal year and for the depreciation of these assets. Businesses must open an account for purchased foreign currencies to show the amounts used for transactions carried out with suppliers and for other operations. Businesses also have to open interim accounts for received and issued checks in foreign currencies. Sarkis Sakr, Chairman of Lebanese Association of Certified Public Accountants (LACPA) said that the aim from this measure is to have further verification in order to minimize fraud.

The issue of inventories has not been fully settled yet. Old inventories recorded at low exchange rates will inflate the profit of businesses when sales are priced at current high rates. “It is advisable to allow firms to reevaluate their old inventories in order to avoid being overtaxed but this requires a new decision,” Sakr said. “They could be charged a small tax on old inventory when they benefit from this option. For example, firms could be charged three percent instead of paying the corporate income tax of 17 percent,” he said.

A firm’s cash and bank accounts as well as the accounts of its different debtors and creditors (such as suppliers and clients) must be closed at the end of the fiscal year at their equivalent value in lira at the official rate. The exchange difference of uncompleted operations involving these accounts must be recorded in the balance sheet. The exchange difference of completed transactions will be considered a foreign exchange gain or loss. It will be included in the income statement.

The daily rates published by reliable entities that monitor the parallel market such as InfoPro Research will be used as indicators for auditing. Sakr said that these rates could only be used as corroborating evidence since they don’t have a legal official status. “A large discrepancy with these rates will be a sign of possible fraud,” he said. Transactions carried out with third parties such as banks, suppliers, and customers, could be doubled checked. Auditors and the tax authorities may, for instance, ask taxpayers to provide a bank statement or a statement of account from their suppliers. Internal transactions such as those carried out with employees will be harder to prove.

According to Hicham El Moukammal, CEO of Crowe Professional Auditors Levant, and Vice Chairman of LACPA, the existence of well-defined standards will preclude an arbitrary exercise of discretion on the part of tax inspectors, especially in light of the lack of legal documents to validate the transaction. Many money changers don’t issue receipts to their customers for foreign exchange transactions. El Moukammal said that the MoF decision ensures that accounting records comply with International Accounting Standards (IAS). But the decision does not comply with the International Financial Reporting Standards (IFRS), according to Mouwafak El Yafi Managing Partner at Alyafi Group.

Financial operations carried out by banks, financial institutions, and financial brokerage firms are not governed by this decision.