Foreign-owned companies in Indonesia that transact in USD, EUR, CNY, SGD, or other currencies need an accounting system that records those transactions in the company’s functional currency while also supporting Indonesian tax reporting and any separate reporting required by the overseas parent company.
Which Currency Should an Indonesian Company Use for Its Books?
A company may receive revenue in USD, pay suppliers in CNY, maintain an SGD bank account, and still use Indonesian rupiah as its functional currency. The currency in which a transaction is settled does not by itself determine the company’s functional currency.
The functional currency reflects the currency of the primary economic environment in which the company operates. Foreign-currency transactions are then translated into that functional currency for accounting purposes.
Setting up multi-currency accounting for an Indonesian company? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Indonesia’s tax rules impose separate requirements on the language and currency used for tax bookkeeping. Indonesian taxpayers generally maintain their tax books in Indonesian and rupiah. Certain eligible taxpayers may maintain bookkeeping in English and USD under Indonesia’s applicable approval or notification procedures.
The distinction applies to a PT PMA whose overseas parent reports in USD. The Indonesian entity may maintain its local books in IDR while providing USD-denominated financial information for group consolidation.
How Should Foreign-Currency Transactions Be Recorded?
A foreign-currency transaction must first be translated into the company’s functional currency when it is recognized. If a foreign-currency monetary balance remains outstanding at the reporting date, changes in the exchange rate can change its value in the accounts.
Assume an Indonesian company with IDR as its functional currency receives a USD 100,000 supplier invoice when the accounting exchange rate is IDR 16,500 per USD. The company initially records a payable of IDR 1.65 billion (USD 100,000).
If the invoice remains unpaid at month-end and the applicable closing rate has moved to IDR 16,800 per USD, the liability becomes IDR 1.68 billion (USD 100,000). The accounting system must capture the IDR 30 million (USD 1,786) foreign-exchange difference rather than leaving the payable at its original IDR value.
The same treatment can apply to foreign-currency receivables, loans, and bank balances. When monetary balances remain outstanding across reporting periods, exchange-rate movements can create gains or losses even though no new transaction has occurred.
Why Can the Accounting and Indonesian Tax Exchange Rates Differ?
The exchange rate used to record a transaction for accounting purposes is not necessarily the rate that applies to the related Indonesian tax calculation.
Indonesia publishes official exchange rates for specified tax and customs calculations involving foreign currency, including certain income-tax, VAT, luxury-goods sales tax, and customs obligations. These rates apply for defined periods and can differ from the exchange rate used in the company’s accounting records.
A company could consequently record a USD transaction at one IDR value in its accounting ledger while calculating the associated Indonesian tax using the applicable government-prescribed rate. The accounting system needs to preserve both calculations rather than overwrite the accounting value with the tax value.
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This applies to foreign-owned companies dealing with Indonesian VAT, withholding tax, and other foreign-currency tax transactions. The accounting records should allow the IDR amount recognized for financial reporting to be reconciled with the amount used for the applicable Indonesian tax calculation.
How Should Foreign-Currency Bank Accounts and Intercompany Balances Be Handled?
A PT PMA may maintain foreign-currency bank accounts even when its functional currency and local books are in IDR. The accounting system should retain the original foreign-currency amount together with its IDR carrying amount so that exchange-rate movements are not confused with actual cash movements.
Intercompany balances create the same issue. A USD loan from an overseas parent may remain fixed at USD 1 million while its IDR carrying amount changes as the exchange rate moves. Interest payments can introduce additional foreign-currency and Indonesian withholding-tax entries.
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If foreign-currency bank, receivable, payable, and intercompany balances are not remeasured consistently at the reporting date, the company’s recorded assets, liabilities, and foreign-exchange gains or losses can be misstated.
How Should an Indonesian Subsidiary Handle Overseas Group Reporting?
An Indonesian subsidiary may need to prepare local financial information under Indonesian Financial Accounting Standards while its overseas parent consolidates the subsidiary in another currency.
If the Indonesian company’s functional currency is IDR but the parent reports in USD, the local books do not need to be replaced with a separate USD accounting ledger solely for consolidation. The group can translate the Indonesian entity’s financial information into the reporting currency required for consolidation.
The accounting system should retain the underlying local-currency records while allowing the finance team to produce the information required by the overseas parent. This avoids maintaining two independent sets of accounting records for the same Indonesian transactions.
Set Up Multi-Currency Accounting with MAP Resources Indonesia
MAP Resources Indonesia can help foreign-owned companies configure accounting processes for foreign-currency transactions while meeting Indonesian accounting and tax requirements. Contact MAP Resources Indonesia at info@mapresourcesindonesia.com.
