Saturday, 18 March 2017

A small note on Foreign Currency Gain/ Loss due to Translations and Transactions

FOREIGN CURRENCY TRANSLATIONS GAIN/LOSS

When a parent company holds subsidiaries, in foreign countries, they need to translate the Assets and Liabilities of their subsidiaries from the foreign currency in which they are reported abroad, onto the reporting currency in the consolidated statements of the parent company. Since there may be fluctuations in the exchange rates, every year, there may arise translation Gain/Loss, every reporting year.

Indian companies have an option to either report the translation Gain/Loss in the PL statement or capitalize them in the balance sheet.

Entries for Reporting in PL statement

Foreign currency translation Loss           XXX
Cash                                                                                              XXX

Foreign currency translation Gain                                                     XXX
Cash                                                    XXX

In this case, since the Gain/Loss is recorded in the operating expenses and is a real cash transaction, they wont show up as as separate head in the Cash flow from operating activities in the CF statement. 

Entries for capitalizing in the balance sheet

Foreign currency translation Reserve           XXX
Cash                                                                                                 XXX

Foreign currency translation Reserve                                                   XXX
Cash                                                        XXX

In this case, since the Gain/Loss is not recorded in the operating expenses and is a real cash transaction, they will show up as as separate head in the Cash flow from operating activities in the CF statement.

FOREIGN CURRENCY TRANSACTION GAIN/LOSS

Whenever a company exports or imports in trade, or does transactions with a foreign country, there is bound to be an exchange gain loss. This will have to be record n the PL statement. 

For Eg:

An Indian company sells a product to the US for $1000 in January 2017. The prevailing currency rate at that time was Rs 66/$. The company records the transaction as follows

Sale                                                                                            66000
Recievable                                     66000 

The company receives the payment in February 2017, when the exchange rate changed to Rs 67/$. The company records the transaction as follows

Recievable                                                                                   66000
Foreign currency transaction Gain                                                    1000
Cash                                              67000
   



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