This thread was prepared by Jeffrey Stricke from Nemo Data Pty Ltd – CFD financial transactions specialist
jeffstricke@gmail.com /
jeffrey@nemodata.com
Umm you guys wrong – do not work on your accounts further until you have read the following instructions on how to do this properly. Should you feel the below too onerous, please feel free to reach out in order to accept and engagement letter from me. Servicing All Australian Reporters.
CFD Report of Non Reliance
You can't rely on the report provided by the CFD provider.
1. They disclaim away liability when producing it, meaning all errors you would report on blindly. CFD providers are humans too, it happens.
2. The level of conflicting interests of the report drafter are at levels too high to articulate.
3. All loses are deductible unless you are engaging in bookie arbitrage
If transactions are processed in line with the afore-threaded discussion, you will
NOT be in compliance with the Australian reporting requirements.
I am a specialist in this field.
The remarks from the above referring their accountant’s recommendation is not only predictable but completely incorrect as it does not consider the foreign exchange rate gain or losses inherent in ALL Australian derivatives that are not quoted in Australian dollars.
Considering the broad range of products in the market, and the narrow possibility of all debits and credits being recorded in the same currency is just, well, unlikely.
Worked Example:
- $1,000 transferred to CFD Company for CFD Forex trading with an online platform.
- We trade in Forex quoted as AUD/USD
- CFDs transactions are all about leverage.
- Using leverage and our AUD $1,000:
- we enter into a transaction to use AUD 20,000 and purchase AUD/USD
- the AUD/USD at the time was quoted as 0.72524 and Converted at 1.
- we predicted a downturn in the currency pair and so entered the transaction as a SOLD AUD/USD transaction.
- the market then goes through an upswing and we close the position with a BUY Order for 0.72581, converted at 1.38216.
What do you think the accounting entries are for this?
If you got something like:
AUD/USD = Purchased USD $14,504.80 [calc. AUD 20,000 x 0.72524]
USD/AUD = Purchased AUD $19,984.29 [calc. USD 14,504.80 x (1/0.72581)]
Starting = AUD $20,000.00
Closing = AUD $19,984.29
Net Loss = AUD $15.71
Looks simple doesn't it.
If you arrived at this answer you need to STOP reporting your CFD transactions and contact me immediately to assist you with your bookkeeping.
jeffstricke@gmail.com &
Jeffrey@nemodata.com
The Correct Approach - THE CORE LOGIC
To get this right, you have to ignore the currency completely. It's a distraction and has nothing to do with the transactions as put in the above calculations. You need to refocus your mind as to what the transaction actually is.
The transaction is for a Contract For Difference - Forex. They refer to CFDs as such because that is what you are buying and selling. In this case, the CFDs are referenced to actual Forex Currency Pairs AUD/USD, known as the underlying, and the values from which the CFD pricing is derived (in theory).
So to restate the logic of the worked example:
Rather than using borrowed AUD $20,000 to purchase USD $14,504.80, think of it this way:
- You purchased 20,000 c.f.d units in the currency exchange pair AUD/USD at a value of AUD $20,000
- Your conversion rate on the c.f.d. was 1.
- The AUD/USD conversion rate took into consideration that for the first part of the transaction element of the CFD product is AUD.
- Using AUD to transact in AUD = 1
- You used $20,000 worth of AUD/USD c.f.d. units
- At the time of purchase, the SOLD cfd units were priced at 0.72524.
What is the 0.72524?
The 0.72524 is the price assigned by the CFD company which is derived from the underlying Forex market current spot AUD/USD rate. Or put another way,
it is the price that your CFD company quotes the currency pair to its customers.
This is readjusted based on the purchasing and selling transaction environment at the time of the CFD Companies customers as well as with reaction to the broader CFD Forex market and Forex market.
So what does that mean for us?
Rather than look at the values of multiplying volumes with values, just take a step back and look at the movement in the currency pairs on sold and purchased.
0.72524 (SOLD) - 0.72581 (PURCHASED) = Movement of -0.00057 in terms of c.f.d points
All you have to do then is:
-0.00057 (MOVEMENT POINTS)
x 20,000 (c.f.d. UNITS PURCHASED)
= 11.40 (LOSS AT STEP 1, STATED IN USD)
This is the part that I think is super sneaky to the whole CFD value realising process is that the CFD Company revalues the 11.40 USD losses on your behalf at a rate different to the one you literally just transacted with reference to.
In the initial details of this worked example, it was stated that the
conversion rate was 1.38216. That refers to these USD $11.40 losses, which then must equal -$15.756624 so your statement reflects a DEBIT of -$15.76. That is your cash impact.
The difference may not seem like much as it equates to approximately 0.32% banking variances in most basic example where the base currency and your currency are the same AUD/AUD and for only 20,000. These variances multiply out just as leverage does when you increase volume, the number of currency conversions are required to be undertaken, and you will see some transactions on your CFD Company bank statements grow as you succeed in trade.
If not corrected, the relative impact is much greater on your FX unrealised and realised currency gains.
WE HAVEN'T FINISHED THAT TRANSACTION YET - MORE LOSSES:
So the CFD Company converted our transaction for us at a:
rate of 1.38216 or 0.72350 inverted (1 / 1.38216)
Was 1.38216 better or worse than the actual exchange rate. If better, great, a gain. If not, it's a loss.
FX losses need to be separated out from invoiced a paid realised gains, records the profit of transacting in the actual currency better or worse than the close for that day
Invoiced
Unrealised Gains and Losses - Sitting on the balance sheet still
Invoices Settled
Realised Gains and Losses - Accounts for changes in the actual references exchange rates between the dates of raising the invoices and the transaction being settled in full. Appears in P&L.
At the point the balance is reduced on your trading account, you must then review the average exchange rate for the period, which you can find online or through your accounting software hopefully if its up to scratch. Before I state the next part, it can't be relied on as tax advice as I do not hold such registrations and qualifications, however, you can verify the following in your own research as to fact, being that the ATO requires these amounts to be identifiable and accurate for the purposes of collecting and collating statistical information on the country and in effect, one way of analysing our competitiveness as a nation.
If you need some help or want something clarified, please let me know and I'll be happy to help.
jeffsticke@gmail.com
cc'd
jeffrey@nemodata.com
If you disagree with anything in this outline, please re-read the content again and again until you've got it, as it's not wrong. So don't confuse others with distractions that aren't even on point. Should you want a clarification of any point using your own example on this thread, I'd be happy to review it together.