What is Trade date accounting?

When an asset is purchased, in trade date accounting, the asset is recognized and brought into the books of account on the date of trade and a corresponding liability is established. The liability is knocked off when the settlement of the liability happens. When the asset purchased is in a foreign currency, it leads to a little more complication. The asset is recognized in the functional currency in which the reporting is made, on the basis of the foreign exchange rate that prevails as on the date of trade. The corresponding liability is also created equivalent to the asset purchased. However when the settlement is done after a few days, the foreign exchange rate is likely to be different from the rate at which the asset was converted. Hence when recording the settlement event in the functional currency, the liability would appear to be settled in the functional currency as either over paid or under paid. This is dealt with by passing appropriate FX translation entry known as ‘Consummated FX translation entry’.

What is Settlement date accounting?

Following settlement date accounting, the asset as well as the liability is recognized on the settlement date. Here the asset gets recorded only at the value at which it is actually settled, the difference between the cost of acquisition actually payable for such investment and the value at which it is recorded in the books of accounts being taken as realized gains on the date of acquisition itself. If the asset is held for trading then it is taken to the profit and loss account directly, and if the asset is an ‘available-for-sale’ asset then it is taken directly to the equity as ‘other comprehensive income’.

Even if the asset happens to be in foreign currency, since the asset is recorded only the date of settlement, the revaluation entries in the functional currency is recorded only at the rate at which it actually gets settled and hence there is no necessity to record any FX translation entries in this case.

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