Foreign Currency

Foreign Currency

The CICA Handbook has a number of recommendations regarding foreign currency translation, some dealing with accounting for a foreign subsidiary and some dealing with the hedging of transactions. We will only deal with the accounting for monetary transactions, and balances of amounts payable or receivable in foreign currencies. The hedging of a transaction occurs when an organization is insulated from a change in the exchange rate, for example through purchasing a foreign currency future’s contract. We will ignore the implications of hedging, other than to say that generally the hedge will establish the exchange rate to be used.

Amounts that will be settled beyond the subsequent fiscal period (some foreign currency loans, for example) are treated somewhat differently and are discussed last.

Accounting for Foreign Currency Transactions

Transactions should be accounted for at the exchange rate on the date of the transaction, unless the amount has been determined by a hedge. (1651.14)

Consider, for example, the following purchase of $100 of books in $US translated to Canadian dollars: Lets assume on receipt of the books, the exchange rate was $1 US = $1.50 Canadian.

Our initial entry is:

  • dr / cr
  • book expense / 150
  • accounts payable / 150

Let us assume that the amount was still payable at the year-end, and the rate was $1 US = $1.55 Canadian. Monetary balances at the year-end need to be translated using the exchange rate at the year-end. (1651.16) We will need to adjust the amount payable and record an exchange loss with the following entry:

  • dr / cr
  • exchange loss / 5
  • accounts payable / 5

After the year-end, the books are paid for and the $US rate has fallen back down to $1 US = $1.50 Canadian. We need to record the gain in the current year. We will recover the loss we recorded in the prior year. (1651.20) Our entry is:

  • dr / cr
  • accounts payable / 155
  • exchange gain / 5
  • cash / 150