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Conversion of foreign currency expenses with local currency

13 September 2009 1,959 views 3 Comments

Dear

I am in a financial organization. Our company pays some expenses (e.g. salary, fees) with foreign currency. In every month we prepare P/L account with local currency. We also perform currency exchange and change our sale/bye rate according to central bank and also booked exchange gain/loss determining mid rate. So, in which rate we convert such foreign curreny expenses with local currency to show in the P/L account monthly as well as yearly? As currency rate is variable, so at year end which rate will be applicable to prepare yearly Trial Balance. I have presented 2 scnerion bellow on expense and profit calculation base on mid rate. Please give details as per IFRS/IAS on such conversion rate.

Scenerio – 1

Month USD Rate Monthly Exp. in Local Currency Accumulated Expenses
Calculation Method Amount
Jan 10 49 (10*49)-00 490 490
Feb 10 50 (20*50)-490 510 1000
March 10 49 (30*49)-1000 470 1470
Dec 10 51 (40*51)-1470 570 2040
Total for the period 2040

P/L Account (local Currency)

Month Profit/(Loss) Accumulated Profit/(Loss)
Jan (490) (490)
Feb (510) (1000)
March (470) (1470)
Dec (570) (2040)

Scenerio – 2

Month USD Rate Monthly Exp. In Local Currency Accumulated Expenses
Calculation Method Amount
Jan 10 49 490 10*49 490
Feb 10 50 500 20*50 1000
March 10 49 490 30*49 1470
Dec 10 51 510 40*51 2040
Total for the period 1990

P/L Account (local Currency)

Month Profit/(Loss) Accumulated Profit/(Loss)
Jan (490) (490)
Feb (500) (990)
March (490) (1480)
Dec (510) (1990)

Any of the above calculation is correct? or which is the calculation method as IFRS/IAS

Regards

Tohel

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3 Comments »

  • Lakhturov said:

    Hello,

    I haven’t completely understood your calculations, but I can give you a general answer to your questions according to IFRS/IAS:

    To calculate the precise amount of ForEx gain/loss, you have to translate all amounts nominated in foreign currencies as of the DAY (not month or year!!) these expenses were incurred. However, your should always remember about the principle of materiality – if translating these expenses on the monthly or even yearly basis (using the average X-rate) doesn’t make your financial statements materially incorrect but saves you much time and effort, you can do just that.

    Then, remember that ForEx gain/loss is recognized not when you incur expenses, but when you revalue resulting liabilities (accounts payable), which happens either on period/year-end date, or on the date this liability is paid. So for your example, if you buy something for $10 in January, you cannot determine your full P/L effect until you pay related AP. If you pay these A/P in January, your total expense will be 490 local units, while if you pay it in February, it will be 500 local units (out of which 490 will be recorded as actual expense in January and 10 as ForEx loss in February).

    Please let me know whether it answers your question.

    Regards,
    Denis

    # 14 September 2009 at 12:29 am
  • admin (author) said:

    Message from Chandra

    Dear

    For all Expenditure or Profit/Loss related items the conversion rate should be the day on which such transaction has taken place. Accordingly, your second method is correct and for all balance-sheet items it should be rate ruling on the closure of the balance sheet or financial year.

    Trust this will serve your purpose

    Chandra

    # 14 September 2009 at 8:25 am
  • admin (author) said:

    Message from Jeroen

    Dear Tohel

    the question is, in what currency your expenses and fees are denominated. If your expenses are denominated in your local currency and only paid out in foreign currency, the local accounts should reflect the expenses in local currency. The fx gain/loss would only arise upon payment. The fx gain/loss is then simply the difference between your account payable and the cash paid out converted to your local rate.

    If your expenses are denominated in foreign currency, you should convert at invoice date spot rate to your local currency, but you can use monthly averages as well. Once the amount has hit your P&L you should not restate at a later reporting date (only monetary assets/liabilities denominated in foreign currency are restated on the balance sheet at each reporting date). Again the fx result is the difference between the account payable and the amount actually paid.

    I would say your final table (Accumulated P&L of 1990) is the correct calculation as you are not restating your expenses each period.

    Hope this helps.

    Regards,

    Jeroen

    # 14 September 2009 at 8:28 am

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