Law Practice Magazine
Large law firms have had international offices for decades, if not longer. Even small firms and solo practitioners are beginning to seek out, or stumble upon, new opportunities to provide legal services to clients in other countries. As wonderful as the expanding opportunities for a global practice are, though, they don’t come without their own particular set of financial and accounting problems.
It’s one thing to decide to pursue work from offshore businesses and individuals. But it’s quite another to realize that billing, collecting and accounting for these transactions means making a range of different decisions to keep the money moving. We hope to help you identify some of the common issues you may encounter and give some guidance in how to handle them. So let’s fold up our maps and dive into uncharted waters.
How Will You Get Paid?
After inquiring into the particulars of a matter, the next thought on most lawyers’ minds is how they will get paid. With domestic clients, this usually centers on the client’s willingness and ability to pay bills when they are sent. With foreign clients, however, there is an additional question of how the actual mechanics of payment will work.
Fortunately, there are many methods by which to be paid in international transactions. Perhaps the easiest currently available is to accept a credit card and have your bills denominated in U.S. dollars. Banks usually give better exchange rates on credit cards than on bank drafts or other negotiable instruments, since most process a larger volume of credit card transactions involving international currencies than any other type of transaction. This can save foreign clients money, too, since they would likely have to pay hefty fees to convert their native currency into a money order or bank draft at their financial institution before sending it to you.
Payment by credit card also saves surface transport time, eliminates the possibility that the remittance will go astray in the mail, and means that you needn’t be concerned with the intricacies of payment and collection of foreign negotiable instruments. For larger transactions, where you want to reduce risks of not being paid even further, you can consider international letters of credit that assure you of payment once the legal work has been delivered. Or you can request retainers, denominated in either U.S. dollars or the client’s native currency, to be held in trust to ensure payment.
International letters of credit (or commercial letters of credit) are governed by international agreements and the Uniform Commercial Code and are designed to ensure payments for goods or services that cross international borders. Here is how they work:
▪ The parties involved are the issuing bank, the advising bank, the buyer and the seller.
▪ Once the seller has provided the advising bank with the required documentary evidence that it has completed its obligations under the contract to the buyer, the issuing bank draws on the letter of credit and pays the seller.
▪ It’s similar to how a trust account works, except the funds are in the control of the issuing bank under written terms that govern how and when the funds will be paid to the seller. The assurance to sellers is that they will be paid once they complete the requirements of their contract with the buyer.
What Do You Do If a Retainer Is in a Foreign Currency?
Let’s assume that you’ve been retained on an international matter and the foreign client has sent a retainer check drawn on his bank, in his native currency. How do you hold and account for the funds pending the rendering of your invoice? You can do so in one of two ways.
First, you can convert the funds into U.S. dollars at the time of receipt and deposit them to your trust account. Then, when you render an invoice, during or after completion of the matter, you can do so in U.S. dollars and deduct what you are owed from the funds in trust in the usual way. (This assumes that your fee agreement provides that statements will be rendered and paid in U.S. dollars.) There are, however, a couple of problems with this approach. Checks drawn on foreign banks may not be negotiable here or, if they are, you may experience significant delays in receiving payment. And when you present a foreign check for deposit at your bank, you will, almost assuredly, incur currency exchange and transaction fees (not to mention the gain or loss due to interim currency fluctuation).
A second option is a foreign-currency pooled trust account. Increasingly, commercial banks and credit unions are offering foreign-currency pooled trust accounts, so it’s a good idea to see if your bank provides these. Using such an account, the foreign funds can be deposited in trust without the necessity of undergoing a currency exchange. When it’s time to render the account, you can render it in the foreign currency, deduct the funds from the foreign currency trust account, and then convert the funds to U.S. dollars. Any exchange fees or transaction costs would (unless your retainer agreement states differently) be treated as a cost of doing business and be expensed. Any gain or loss on currency fluctuation is typically accounted for on the firm’s income and expense statement as a “Gain or Loss on Foreign Exchange.”
How Do You Bill, in Dollars or Dinars?
If written retainer agreements are important in avoiding misunderstandings with domestic clients, they are absolutely critical when it comes to foreign clients. The decision of which currency to use will depend on your negotiations with your client, but whatever is decided, clearly set it forth in your retainer letter or agreement. This will help you short-circuit future problems.
Rendering your account in U.S. dollars will certainly simplify matters from your perspective, but it may not meet with the approval of your foreign client, and it may not be in your best interest right now, either.
Your client will, understandably, be anxious to know exactly how much the representation will cost, and currency fluctuations will only exacerbate the uncertainty. In the past, when the U.S. dollar seemed to only increase in value, requiring payment in U.S. dollars made sense. It placed all the risk of currency fluctuation, as well as the costs of conversion, on the client. For firms competing to attract and retain international clients, this approach had some obvious disadvantages. However, now that the U.S. dollar is at an historic low, firms doing business internationally are in a much better position to provide their clients with certainty, while also providing themselves with a hedge against a further slide in the value of the dollar in the near future.
Accordingly, you may now wish to quote the work, either on an hourly basis or a fixed-price basis, in the client’s native currency. In each case you will provide your client with certainty—but you need to be aware that you will be assuming certain risks:
▪ First, if you negotiate an hourly rate based on a foreign currency, you are betting that the foreign currency will go up, or at least not go down, against the dollar between the time of quoting the work and receiving payment.
▪ Second, if you agree to a fixed rate in a foreign currency, you are placing an additional bet that—regardless of currency fluctuations—you can complete the work within the fixed budget and within the range of fluctuation in value that may occur.
Of course, these are bets that may pay off if you’ve done your homework regarding both the stability of the foreign client’s native currency and the amount of time needed to complete the work.
Pesos Today, Pounds Tomorrow?
Now let’s look at another common problem. Assume that you complete your work, based on time entries in U.S. dollars, and enter it in your books as a receivable; perform a currency conversion to render your invoice in the client’s native currency based on the exchange rate at the time the invoice is sent; and, much later, actually receive an international draft. Of course, the exchange rate has changed several times since you sent the bill. Now what?
Typically, you have two issues to deal with. One is the pricing of the work at the time of rendering the invoice and the other is the exchange rate at the time of receipt of payment. From the client’s perspective, you’ve invoiced your work and received payment in the amount stated. Unless the fee agreement provides otherwise, the account has been settled and should be reflected as paid in full on your books to avoid future confusion.
On your financial statements, though, you will still have to deal with the fact that the currency of payment may have appreciated or depreciated, relative to the U.S. dollar. If the currency appreciated, you will be sitting with a net gain; accordingly the account receivable is shown as paid and the gain posted to the “Gain or Loss on Foreign Currency” journal. If the currency depreciated, the account receivable is still shown as paid, but in this case a loss is posted to the “Gain or Loss on Foreign Currency” journal.
How Many Sets of Financial Statements Do You Need?
Operating an office in a foreign jurisdiction opens up a host of issues. These are some of the key things you must deal with in financial statements:
▪ Different tax codes
▪ The allocation of overhead expenses incurred by the parent firm but that benefit the foreign operation
▪ The fact that costs are incurred in foreign currencies but salaries or draws to the lawyers in question are, in most cases, denominated in U.S. dollars
Generally Accepted Accounting Principles (GAAP) usually require that you produce a consolidated set of financial statements, translated into U.S. dollars. While this should be done for financial accounting purposes, it may be advantageous to also produce a separate set of financial statements for the foreign office, enabling you to conduct detailed financial and cost analysis of the foreign operation, separate from the domestic operations.
The process of working for and being paid by international clients does not have to be overly complex. However, it does require attention to the details in negotiating payment and engagement terms at the outset. Provided that you are attentive to these details, you may find that the flatness of the new world suits your law practice quite well.
David J. Bilinsky is a practice management consultant who focuses on enhancing law firm strategy, finance and technology initiatives, as well as Editor-in-Chief of Law Practice magazine. He blogs at ThoughtfulLaw.com.
Laura A. Calloway is Director of the Alabama State Bar’s Law Office Management Assistance Program.