Clearing, FX Gain/Loss, and CTA

#Clearing Explained

Clearing is matching two GL entries to show they've been settled:

AP Example:

• Invoice Payable posts: Debit Expense, Credit AP
• When paid, Payment posts: Debit AP, Credit Cash
• Both are matched/cleared to show the invoice has been paid

AR Example:

• Invoice Receivable posts: Debit AR, Credit Sales
• When customer pays, Payment posts: Debit Cash, Credit AR
• Both matched/cleared to show the invoice has been collected

Clearing links the entries without modifying them—both remain as originally posted.

#Clearing Workflow

Typical clearing process:

1. Transaction posts - Document creates GL entries
2. Clearing happens - Second entry matches the first
3. Both marked cleared - System shows they've been matched
4. Audit trail - Records who cleared and when

For example:

• Invoice created and posted to GL
• Bank processes payment
• User matches invoice to payment (manually or auto)
• Both marked as cleared

#Partial Clearing

When amounts don't match exactly:

Scenario:

• Invoice for $10,000
• Two partial payments: $7,000 and $3,000

Clearing:

1. First payment clears $7,000 of the invoice
2. Invoice status becomes "Partially Cleared"
3. Second payment clears remaining $3,000
4. Invoice status becomes "Cleared"

GL shows all three entries linked together.

#Clearing with FX Adjustments

When clearing involves FX differences:

Scenario:

• AR Invoice posted: 100,000 EUR at rate 1.20 = 120,000 USD
• Customer payment received: 100,000 EUR at rate 1.18 = 118,000 USD
• FX loss: 2,000 USD

GL entries:

1. Invoice posts: Debit AR $120,000, Credit Sales $120,000
2. FX revaluation: Debit FX Loss $2,000, Credit AR $2,000 (GL now $118,000)
3. Payment received: Debit Cash $118,000, Credit AR $118,000
4. AR now shows zero; amounts are cleared

Or, without revaluation:

1. Invoice posts: $120,000
2. Payment posts: $118,000
3. Clearing shows match at $118,000 with $2,000 FX loss recorded in clearing entry

#Realized vs. Unrealized FX Gains/Loss

Unrealized FX Gain/Loss

• Occurs when unsettled foreign currency item revalues
• Example: AR in EUR revalues due to rate change
• Flows to P&L (or OCI under IFRS)
• Reversed if rate changes again before settlement

Realized FX Gain/Loss

• Occurs when foreign currency transaction finally settles
• Example: Receive EUR cash at different rate than invoice posting
• Final, actual gain or loss
• Not reversed (it's real)

Most FX transactions have both unrealized (during holding period) and realized (at settlement) components.

#FX Clearing Entry

When clearing foreign currency items:

Entry for realized FX gain/loss:

• Debit/Credit: Cash account (actual amount received)
• Debit/Credit: AR/AP account (to adjust for FX)
• Debit/Credit: FX Realized Gain/Loss account (the difference)

This entry records:

• How much cash actually came in
• The FX impact vs. original posting
• The cleared status of the documents

#CTA (Cumulative Translation Adjustment)

CTA arises when translating foreign subsidiary GL:

Scenario:

• Subsidiary in UK operates in GBP
• Parent in US reports in USD
• UK subsidiary assets: 1,000,000 GBP
• Convert at start of year: 1.30 USD/GBP = 1,300,000 USD posted
• At year-end: 1.28 USD/GBP = 1,280,000 USD actual
• CTA: 20,000 USD loss (GBP weakened)

GL entry for CTA:

• Debit: CTA account (equity)
• Credit: Asset account (to reduce from 1,300,000 to 1,280,000)

CTA is part of equity and flows through Other Comprehensive Income (OCI).

#CTA Reversal

When a CTA item settles or is disposed:

Scenario:

• Subsidiary sold to third party
• UK assets previously had CTA of (20,000) USD loss
• Upon sale, CTA is realized
• Entry: Debit Gain on Sale, Credit CTA (reversal)
• Gain on Sale now includes the CTA

When you sell/liquidate a subsidiary, its CTA flows to realized gains/losses.

#Deferred Tax on FX

FX gains and losses have tax implications:

Taxable FX Gains/Loss:

• Most jurisdictions tax realized FX gains/losses
• Unrealized gains typically not taxed until realized

Deferred Tax Accounting:

• If financial statement shows FX loss but tax doesn't recognize it yet
• Create deferred tax asset

Example:

• Financial: FX loss of $10,000 (reduces pre-tax income)
• Tax: No deduction allowed until paid (deferred)
• Create deferred tax asset: Debit Deferred Tax Asset, Credit Tax Expense

#Netting FX Positions

For companies with natural hedges:

Scenario:

• AP in EUR: owe 100,000 EUR
• AR in EUR: owed 80,000 EUR
• Net position: owe 20,000 EUR (10% of exposure)

Treatment:

• Don't separately revalue; net them out
• Only the net position gets revaluation entry
• Reduces GL volatility and more accurately reflects economic position

This requires specific account structure and clearing logic.

#Hedging and Clearing

For hedged FX positions:

Example: Forward contract hedge

• AR in EUR for 100,000 EUR at rate 1.20 (posted as 120,000 USD)
• Forward contract locked at 1.18
• Customer pays at 1.19

Result:

• AR realized loss: 1.20 to 1.19 = 1,000 USD loss
• Forward contract realized gain: 1.18 to 1.19 = 1,000 USD gain
• Net: Zero FX impact (hedge worked)

Hedge accounting matches the gains and losses for net zero impact.

#Clearing Discrepancies

Sometimes clearing amounts don't match:

Possible reasons:

• Bank fees reduced payment
• Rounding differences
• Partial payment
• Data entry error

Resolution:

1. Identify reason for discrepancy
2. Create FX or other adjustment if legitimate
3. Clear the matched amount
4. Record remaining as pending or excluded

#Automatic Clearing

Light can automatically clear matching items:

Rules trigger clearing when:

• Bank transaction amount = Invoice amount
• Dates are within tolerance
• Accounts match
• Reference numbers match

Automatic clearing saves manual work but requires proper GL setup and matching rules.

#Reporting FX and Clearing

Income Statement:

• Realized FX gains and losses as line item
• Separately from operating results

Balance Sheet:

• OCI or Equity section shows unrealized FX gains/losses
• CTA shown separately in equity

Cash Flow:

• Actual cash impacts of FX (realized gains/losses)
• Not unrealized (they're non-cash)

Notes:

• Explain FX policy
• Discuss hedging strategies
• Show FX impact by currency

#Best Practices

• Match frequently - Daily or weekly prevents large backlogs
• Document basis - Note why amounts don't match exactly
• Monitor CTA - Track CTA balance for foreign operations
• Understand policy - Know whether you accrue or defer FX
• Test hedges - For hedged positions, verify effectiveness
• Reconcile currencies - Each currency should reconcile separately
• Report clearly - Separately show FX impacts in reports
• Plan for volatility - Budget for FX impacts in forecasting

#Related Articles

• FX revaluations
• Multi-currency reconciliation
• Multi-entity ledger management
• Automated bank reconciliation