If your business invoices a customer in one currency but keeps its books in another, the amount you record on the invoice date is rarely the amount you end up receiving. The difference is an exchange difference. Understanding when it is recognised, and why it appears in two stages, makes multi-currency books much easier to follow.
The basic rules
The treatment below follows the approach of IAS 21, which many businesses use. Your own framework may differ, so check it with your accountant.
- Record a foreign-currency transaction in your reporting currency at the rate on the transaction date. An average rate may be used as an approximation if rates do not move much.
- At each reporting date, translate monetary items (cash, receivables, payables, loans) at the closing rate.
- Items carried at historical cost, such as equipment, are not retranslated.
- Exchange differences on monetary items are generally recognised in profit or loss.
Realised and unrealised
A realised difference arises when a foreign-currency balance is settled, for example when the customer pays. An unrealised difference arises when an open balance is revalued at a period end, before anything has been paid. The unrealised amount is a paper movement that may later change, but it is still recorded so the balance sheet shows the current value.
A worked example
Your reporting currency is EUR. You invoice a customer USD 10,000. The rates below are illustrative only.
| Date | Rate (EUR per USD) | Receivable in EUR | Difference recognised |
|---|---|---|---|
| Invoice date | 0.90 | 9,000 | None |
| Period end (revaluation) | 0.92 | 9,200 | 200 unrealised gain |
| Payment received | 0.95 | 9,500 | 300 realised gain |
| Total over the life of the invoice | 500 gain |
At the period end the receivable is revalued from 9,000 to 9,200, so a gain of 200 is recorded. When the customer pays, the cash received is 9,500, and the remaining 300 is the realised gain. The two stages add up to the full 500 difference between the invoice rate and the payment rate.
If you owed USD 10,000 instead of being owed it, the same movement would be a loss. A rising foreign currency increases what you owe.
Good habits
- Revalue at every period end. Open foreign-currency receivables, payables and bank balances should all be included.
- Keep a rate table with its source and date. Whoever reviews the books should be able to see where each rate came from.
- Decide your rate policy in advance. For example, the spot rate on the date, or a monthly average, and apply it consistently.
- Reconcile foreign-currency bank accounts in their own currency first, then look at the exchange effect on your reporting currency.
- Keep the revaluation entries visible. A log of each revaluation makes review and audit simpler.
Fox Pro Accounting lets you enter exchange rates manually or fetch them through an API, and revalues foreign-currency balances on a schedule with a log you can review. The Banking page describes it.