Both realized and unrealized exchange gains and losses.

On realized and unrealized profits and losses. Paul Roberts Visitors: 88 ★★★★

When a company headquartered in a certain country makes a transaction with a company located in another country (overseas) using a currency other than its local currency, the settlement of this transaction necessarily involves a currency exchange, which consists in converting one currency into another. Depending on the exchange rate applied, such a conversion may generate a profit or loss (exchange rate).

Realized losses and exchange gains.

Realized exchange rate gains and losses may arise when a partial or full payment is included in the amount of an invoice or expense item.

Note: Profits and losses are calculated on each amount paid, not on the remaining balance due on an invoice or expense.

The balance is paid in full.

In the following example, the transactions were settled using a cash payment. Consequently, the Exchange Gain or Loss has been realized and recognized in accounting terms at the date the payment is received.

For example: an American company that buys goods from a British company that requires payment in pounds sterling must exchange dollars ( $ ) for pounds ( £ ) to pay for the transaction. This conversion from one currency to another requires the use of an exchange rate. If an American company purchased goods from a British company on June 1 for a total of £1,000, while a pound was worth $1.40 on that date, it would have to exchange $1,400 for £1,000 to pay for the purchase.

Note: The exchange rate used here is only an estimate and does not reflect the current exchange rate.

Since the US company maintains accounting records in US dollars, the transaction is recorded as follows:

The indicated amount of purchases as of June 1, 1400 cash register 1400.

Payment of invoice No. 1725 issued by Sterling Co.

£1,000, exchange rate: $1.40 per pound.

Suppose, for example, that on July 10 this American company made a purchase of 100,000 yen from a Japanese company, and on that date the exchange rate was $0.004 to 1 yen. since the American company keeps its books in dollars, this purchase is recorded for a certain amount. from $400 (or 100,000 yen x $0.004) as follows:

The indicated amount of purchases as of July 10 is 400 supplier invoices - Mr. Suzuki 400.

100,000 yen, exchange rate: $0.004 per yen.

Now suppose that on the date of payment, that is, August 9, the exchange rate has risen to $0.005 for 1 yen, then the amount of 100,000 yen recorded in the books of suppliers must be paid by exchanging 500 dollars (100,000 yen x 0.005 USD) per 100,000 yen. In this case, the US company has a $100 foreign exchange loss because it needs to pay $500 to pay off a $400 debt (vendor bill). Cash payment will be registered as follows :

All transactions with foreign companies can be analyzed in the same way as we did in the previous examples. Suppose, for example, that on May 1, when the dollar/euro exchange rate was $0.25 to 1 euro (euro), an American company booked a sale to a French company for $1,000 and billed the sale in euros (or 4,000 Euro). This transaction will be written as follows:

Now suppose that as of May 31, that is, the date the cash payment was received, the exchange rate rose to $0.30 per €1, after which the US company made a foreign exchange gain of $200. The winnings came from the fact that all €4,000 were worth $1,000 on the date of sale and were worth $1,200 (or €4,000 * $0.30) as of May 31, the date the payment was received. Then the cash payment will be registered as follows:

Partial payments.

If the balance is not paid in full, the system calculates exchange rate gains and losses on each payment, not on the amount of the remaining invoice or expense item. A currency conversion gain or loss is recorded only if the payments are accounted for under the registerfixed accounts. The system uses the following formula to perform this calculation:

Amount of profit/loss = (fee/average exchange rate) - (fee/exchange rate of payment)

Average invoice exchange rate = remaining amount due in foreign currency / remaining amount due in local currency.

Take, for example, a German company that buys goods from an American company, which it pays in Euros (EUR). The US company then has to exchange those euros for dollars to settle this deal. In this example, the German company pays off its debt in multiple payments rather than a single payment. This transaction will be written as follows:

Foreign currency amount (EUR) Exchange rate Local currency amount (US dollar) Notes Invoice No. 101 1100.00 2000 550.00 availability 201 200.00 4000 50.00 Profit/loss currency 50.00 = (200, 00/2.00) - (200.00/4.00) = 50.00 loss payment 301 600.00 3000 200.00 Profit / loss currency 100.00 = (600.00/2.00) - (600 .00/3.00) = 100.00 loss payment 302 300.00 3000 100.00 Profit / loss currency 50.00 = (300.00/2.00) - (300.00/3.00) = 50 .00 loss.

Unrealized foreign exchange losses and gains.

However, if the financial statements are prepared between the date of the original transaction (such as a purchase or sale) and the date the cash or cash payment is received, and if the exchange rate changes during that period, the exchange rate gain or loss will change. the results obtained should be reflected in these financial statements.

Suppose, for example, that a $1,000 sale was made in a German company on December 20, when the exchange rate was $0.50 for 1 Euro (Euro), and the transaction was recorded as follows:

Assuming the exchange rate rose to $0.45 for €1 on December 31st, on the balance sheet termination date, $1,000 recorded in customer accounts would then only be worth $900 (or €2,000 x $0.45) .). This "unrealized" foreign exchange loss would then be recorded as follows:

Now suppose that 2,000 euros are received on January 19 next year, when the exchange rate rose to $0.42, the exchange rate is expected to fall further from $0.44 to $0.42 per euro. The receipt of this cash payment would then be recorded as follows:

Nominal amount January 19 cash amount 840 foreign exchange loss (0.03 USD X 2000 EUR) 60 customer accounts-Mueller Co. 900.

Receipt of cash payment on account No. 22.

2,000 euros or $840, exchange rate: $0.42 per euro.

If the exchange rate had risen between December 31st and January 19th, the exchange gain would have been recorded on January 19th. For example, if this exchange rate were to rise from $0.45/€1 to $0.47/€1 over that period, the accrued Exchange Gain would be $40 (or $0.02 x €2,000).

Consolidated financial statements including foreign subsidiaries.

Before proceeding with the consolidation of the financial statements of local companies and foreign subsidiaries, the amounts indicated in the financial statements of these companies must be translated into local currency. The amounts reflected in the liabilities and assets of each foreign subsidiary are usually converted into local currency based on the exchange rate prevailing at the closing date of the balance sheet. Income and expenditure are, in principle, translated using the exchange rate ruling at the date of the transactions. (For practical reasons, the weighted average exchange rate for the entire financial year is usually used.) Adjustments (gains or losses) arising from the conversion are accounted for as a separate entry in the equity section of the balance sheet of foreign subsidiaries.

After the financial statements of foreign subsidiaries have been converted into local currency, the consolidation of these statements and the statements of local companies is carried out in the usual way. For more information, see Consolidation - General Information.


Paul Roberts
Paul Roberts

Paul Roberts 51 years old Born in Edinburgh. Married. Studied at University of Oxford, Department of Public Policy and Social Work. Graduated in 1997. Works at Standard Life Aberdeen plc.

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