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Foreign Currency

28 August 2008 1,349 views No Comment

Dears

I have a question regarding bank a/c in foreging currency, as we have one bank account in euro, where as we are maintaing our books in local currency (other than euro).
Every month we there is difference in exchage rate, and we closing our books on monthly basis. in my opinion we have to record the difference (if there) every month either expense or income, where as my manager want to show this difference (if there) one time only at the year end and he want to keep this monthly difference in temporary account (like other accurals).
So need your opinion in this regard.
Thanx & regards.
Hameed


You are right, every closing the exchange rates have to be updated and the gain/loss has to be recorded in the P&L. The only reason not to do this would be materiality (i.e. the effect is not material on net income and equity).

Kind regards,

Henk


 

 

Your comments are enlightening to me since currently am preparing for ACCA P2 exams. Most of the things am readings are just theories but its good to hear these things happening the world of accountants.please continue commenting am benefiting.

 


 

We do not record in P&L immediately. We first book all items on a temporary account (countervalue of the foreign exchange position) and then we only book the net amount on P&L by eleminating this account. It is important to know how this position on this euro account has been created.
If you have funding for the same amount and the amount is placed pn that account, there is no FX position and so there will be no impact on P&L. If this euro position has been created by a foreign exchange transaction or by paiement of invoices in other currency than the home currency, then a foreign exchange risk exists en all gains and losses need to be recorded immediately in P&L.
Peter.


 

From a tax perspective, at each period end, we would revalue all deferred tax assets and liabilities stemming from temporary differences at the ending spot rates.  This will be a B/S revaluation.  If you had any subsequent revisions to previously booked deferreds, then that true up would need to come through to the P&L (unless it were originally taken through equity).

Any transactional gain in going from operating currency to functional currency (if different) would be a P&L item.

So from my perspective the difference is whether you’re dealing with a current period P&L item – where the difference would be booked to P&L – or on a carrying balance on the B/S, in which case the currency translation adjustments would be balance sheet.

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