Let us examine the treatment of exchange differences in the books of accounts with a practical example.

Let us analyse the treatment of foreign exchange differences arising on account of translating the foreign currency balances to the presentation currency in respect of monetary items.

The exchange differences arise either on settlement or on remeasurement at the reporting date.

In both these cases, the exchange differences are recognised in the profit and loss account.

Let us briefly understand the difference between the FX revaluation entry and the FX translation entry.

The FX revaluation is converting every transaction in foreign currency into functional currency at the exchange rate on the date of transaction.

This means that there will be an entry in functional currency for each and every transaction in foreign currency.

FX translation on the other hand is performed at the account level.

There will be one journal entry for each account at the valuation date or at the settlement date based on the exchange rate on the date of valuation or settlement, as the case may be.

Let us take an example of accounting for the exchange differences arising on account of purchase of equity shares designated in foreign currency.

Let us assume that the functional currency is INR.

Bought 100 shares at $59 per shareEntry in foreign currency

Date Particulars Debit (Rs.) Credit (Rs.)
5-Jan-X1 Investment (Equity Shares – FVTPL) A/c

5900

  To Payable to Broker A/c 5900
(Being 100 shares of Zenith Inc purchased at $59)

 Revaluation of transaction above FX rate Rs. 63/- – FX Revaluation entry

Date Particulars Debit (Rs.) Credit (Rs.)
5-Jan-X1 Investment (Equity Shares – FVTPL) A/c

3,71,700

  To Payable to Broker A/c

3,71,700

(The entry for purchase of equity shares @ 63.00 being the exchange rate on traded date)

 Settlement of liabilitySettlement entry in foreign currency

Date Particulars Debit (Rs.) Credit (Rs.)
8-Jan-X1 Payable to broker  A/c

5900

  To Bank A/c

5900

(Being the settlement of liability towards purchase of equity shares on settlement date)

 Revaluation of above transaction to broker FX rate Rs. 63.22 – FX Revaluation entry

Date Particulars Debit (Rs.) Credit (Rs.)
8-Jan-X1 Payable to broker  A/c

3,73,057

  To Bank A/c

3,73,057

(Being revaluation of the amount paid to the broker at the exchange rate of 62.83, which is the exchange rate on the date of settlement)

Recognition of gain/loss on settlementFX translation entry

Date Particulars Debit (Rs.) Credit (Rs.)
8-Jan-X1 Realised currency loss A/c

1,357

  To payable to broker A/c

1,357

(Being the realised currency loss adjusted with the broker account representing the fluctuation in the exchange rate between the trade date and the settlement date as shown in the following table)

 

Currency gains/loss on settlement date: 08-Jan-X1 INR
a) Purchase price as of 05-Jan-X1

3,71,700

b) Settlement amount in INR terms on 8-Jan-X1

3,73,057

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