Indonesian companies can transact in currencies different from the currency used for their bookkeeping. These transactions do not require a second set of books. Each foreign-currency transaction must instead be recorded appropriately in the company’s functional currency, with subsequent exchange-rate movements accounted for where required.
Start With the Company’s Bookkeeping Currency
Indonesian companies generally maintain their tax books in Indonesian and rupiah. Certain taxpayers, including qualifying foreign-owned companies (PT PMAs) and companies whose functional currency is US dollars under Indonesian accounting standards, can maintain tax books in English and US dollars after meeting the applicable notification or approval requirements.
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The tax bookkeeping currency should not be confused with the currency used for individual transactions. A company keeping its tax books in rupiah can still hold USD bank accounts, invoice customers in foreign currencies, purchase imported equipment, or enter into foreign-currency loans.
Recording Transactions in Foreign Currencies
A foreign-currency transaction is initially recorded in the company’s functional currency using the applicable exchange rate under its accounting framework. For a company with a rupiah functional currency, a USD, EUR, SGD, or other foreign-currency transaction is translated into rupiah on initial recognition.
Consider a PT PMA that invoices an overseas customer US$50,000 while maintaining a rupiah functional currency. The invoice is denominated in US dollars, but the corresponding revenue and receivable are recognized in rupiah using the applicable accounting exchange rate.
The original foreign-currency amount should still be retained in the accounting records so the company can track the receivable, settlement, and any subsequent exchange difference.
Which Exchange Rate Should You Use?
Companies need to distinguish between exchange rates used for financial accounting and those prescribed for Indonesian tax calculations.
Foreign-currency transactions in the financial statements are accounted for under the applicable Indonesian financial accounting standards (PSAK). The appropriate accounting rate depends on the nature and timing of the transaction and the applicable accounting requirements.
Indonesian tax rules may prescribe a different exchange rate for particular tax obligations. The Ministry of Finance publishes weekly Kurs Pajak rates used for specified Indonesian tax and customs calculations involving foreign currencies.
A foreign-currency transaction can therefore produce one rupiah amount for accounting purposes and another for the related tax calculation. This does not necessarily indicate an error. The finance team should be able to reconcile the difference and retain the supporting invoices, contracts, exchange-rate records, and tax calculations.
How Foreign Exchange Gains and Losses Are Recorded
Foreign-currency cash, receivables, payables, and loans are monetary items. If the exchange rate changes between initial recognition and subsequent measurement or settlement, the company may recognize a foreign-exchange gain or loss under the applicable accounting standards.
For instance, a PT PMA with a USD receivable may initially recognize the transaction at one IDR/USD exchange rate. If the rupiah weakens before the customer pays, the rupiah value of the outstanding USD receivable increases. The resulting exchange difference must be accounted for appropriately.
Foreign-exchange gains or losses can also affect taxable income, subject to the applicable Indonesian tax treatment.
What Happens With Foreign-Currency Loans and Intercompany Transactions?
An Indonesian company may receive a USD loan from its overseas shareholder or have foreign-currency payables arising from management services, royalties, purchases, or other related-party transactions.
Intercompany transactions may also create Indonesian withholding tax, transfer pricing, or other tax consequences. The accounting treatment of the foreign-currency balance should be reconciled with the underlying agreement and the company’s tax reporting.
How a PT PMA Records a Foreign-Currency Equipment Purchase
Consider a PT PMA that maintains a rupiah functional currency and purchases manufacturing equipment from Germany for EUR 100,000.
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The company initially recognizes the equipment and corresponding payable in rupiah using the exchange rate required under its accounting framework. The equipment is a non-monetary asset, while the unpaid EUR payable is a monetary liability.
If the EUR/IDR exchange rate changes while the payable remains outstanding, the rupiah amount of the liability may change, resulting in a foreign-exchange gain or loss. Any Indonesian tax obligation arising from the transaction must be calculated using the exchange rate required under the applicable tax rules.
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MAP Resources Indonesia can help foreign investors manage multi-currency bookkeeping, reconcile foreign-currency transactions, and align their accounting records with Indonesian reporting requirements. Contact us at info@mapresourcesindonesia.com.
