Accounting treatment of currency valuation differences

Standard for changes in exchange rates (currency valuation differences) Egyptian Standard No. 13 and International Standard No. 21

Before starting our topic, we must know some specific concepts related to the topic

Transaction currency: It is the currency that is dealt with in the country in which the company deals, such as the pound in Egypt and the riyal in Saudi Arabia

Exchange Difference: The difference resulting from converting a specific currency unit into other currencies at different exchange rates

For example, if 1000 dollars is converted into 10,000 Egyptian pounds, meaning that the exchange rate = 10 dollars

 

Terms you should know before evaluating currency differences
 

Spot price: the exchange rate for immediate delivery, meaning the exchange rate at the time of buying or selling (the first measurement).

Closing price: the exchange rate on the date of preparing the budget, meaning the price on 31/12 (subsequent measurement).

 

Presentation currency: the currency used in preparing the financial statements, the currency of preparing and displaying the lists, meaning another currency in which the events are translated into the (measurement currency...)

 

How to record transactions

Transactions that take place in a foreign currency are recorded at the spot exchange rate on the date of the exchange, and transactions that take place in a foreign currency are recorded in the books of your company at the spot exchange rate on the date of the exchange or by using an average exchange rate if the fluctuation in the exchange rates is slight, meaning the monthly average; The best is the immediate exchange rate, which means any exchange rate on its date

 

Appearance, of currency differences.

We can say that any event in a currency other than the presentation currency requires us to convert the foreign currency into the presentation currency (at the time of the event and on the date of preparing the financial statements). This appears in cases where your company is buying or selling to foreign clients or suppliers. It also appears if you are the opening of a foreign currency account in your country; and therefore the differences in currency valuation may appear at the end of the financial period while you are doing the evaluation of bank balances, It is also possible that the differences in the valuation of a currency appear if you, as a company, have subsidiary companies to you or his brother's companies in other countries, and therefore when there are transactions with these companies, the differences in the valuation of the currency appear, and we will see this with an example.

 

Currency Offer

There are a range of factors that determine what is the Currency Offer

 

1-The currency in which the company sells, meaning that it imports cash through it  

 

2- The currency which payment is performed through .

 

 3- The currency of the country in which they are handle

 

Monetary and non-monetary items:

Monetary items: the cash uniform, whether in the warehouse, current accounts, clients, suppliers, loans and bank facilities, are reassessed at the end of any financial period if there is a balance left in it, meaning if the company owes the supplier in dollars and has not been repaid, an assessment of the supplier's balance is done at the end of the Financial period, and The same for customers and cash balances.

 

Non-cash items: such as inventory, fixed assets, intangible assets, prepaid expenses, are not subject to any revaluation.

 

Differences of Earned and Unearned currency

It means that the process has been settled, as we made invoice a foreign customer, this invoice was valued at 50,000 dollars, the dollar was 15 pounds, but the customer paid it on 20/12 and the dollar was 17.

 

Of course, there will be differences in the currency, but these differences are considered achieved because the sale process has been settled and ended.

 

Assuming that the payment process took place after the end of the financial period, and because he is a foreign customer of course, he still owed his debts in dollars, but I had valued the dollar in my books during the sale process at 15,

And the dollar is now 17, so I will make an evaluation entry on the new price, and this currency difference is considered its working difference Unearned.

 

The whole idea in this part is the earned currency difference and the unearned currency difference.

These will appear more in the topic of the cash flow statement

Together, we will see very many examples of debit and credit currency differences and revaluation of balances.

 

An example of an accounting treatment for currency valuation differences

 

A company working in the iron field imports 240 tons of ores, the price per ton is 1000 dollars from the supplier x and has opened a documentary credit in the National Bank

 

 

According to the terms of opening the credit with the supplier (suppliers' facilities) Supplier facilities 90 days, meaning payment to the supplier after 90 days from the date of shipment

The accreditation was opened on 11/20/2004, the accreditation number 814/2004

I understood that I will not transfer the money to the supplier until 90 days after the date of shipment of the goods and the date of shipment of the goods 5/12/2004

The documentary credit will be according to the terms of your contract with the bank

If this means that the loan facilities account (current debit) of the company with the bank is one of the conditions of the contract.

 

The company covers 10% of the credit value (meaning the company pays 10% of the credit value, and the bank covers you 90% of the credit value (meaning the bank pays 90% of the credit value to the supplier, and of course the company will return it pays the second amount of the loan with interest at specific dates according to the terms of the contract) This is, of course, if you have a credit balance available at the bank, but In case there is no credit balance, so here you must provide the full value of the credit

 

  And it is possible that the bank covers you with all the credit from the loan facilities account according to your agreement with the bank and according to the company's facilities contract with the bank and according to what is available to you in your balance in the facility account as well.

 

. It is also possible for the supplier to request 10% or any down payment and the rest to be facilitated by suppliers

In other words, this issue will be according to the agreement, whether with the bank or with the supplier

On the date of opening the credit 11/20, the exchange rate was 10 pounds
 

First, the value of the credit in dollars = 240 tons * 1000 = 240,000 dollars

 

Like what we say, the conditions of accreditation are that it contains 10%. As a company, I pay them from my account

 

Whether my accounts are in Egyptian pounds, or open an account in dollars in the bank, because the bank deducts them from the dollar account.

 

If I have an account in Egyptian pounds, the 10% value will be deducted from the exchange rate on that day

 

 

But, suppose I don't have dollars, but I have the balance in Egyptian pounds

 

The price of the dollar today was 10 pounds

 

To be deducted = 240000 * 10% * 10 pounds = 240000

Accounts / letters of credit 240,000

                To

National Bank account / current or cash 240,000

 

This is a value of 10% cash cover from adopting a number as well as deducted from the current account, so the remaining 90% of the credit value, as we said; the company has opened a facility contract from the bank that can finance you the credit in the form of loans against interest. We assume that you pay the bank every 120 or 90 days

 

. According to the terms of his contract with the bank, meaning the bank will pay me to the supplier on 3/5/2005, and I will pay to the bank, of course, 120 days after the bank pays the value of the credit to the supplier according to the terms of the contract with the bank

 

The idea is important, and this is important for the accountant. Banks are more important than the entries, and these are simple things

So, I will have two dates

The date of payment to the supplier (the bank has to pay it to me according to the terms of credit)

 

The date of the loan payment to the bank

 

  The amount of credit, which the bank pays to suppliers in the company, is in the form of short-term loans with duration of 60, 90 or 120 days, and of course the interest is calculated day by day.

 

The value of the loan must be paid within the granted period according to the terms of opening the facility contract; otherwise the company will be charged a fine and higher interest according to the terms of opening the loan facility with the bank

 

The goods entered my store on 12/20 and the exchange rate was 12 pounds

So I'll make an accrual entry for the supplier

The value of the message is in dollars, of course, without clearance costs, etc.

 

  12$ = 2880000    × 240,000

 

 

 

The entry:

 

Accounts / documentary credits 2,880,000

(accounts / foreign supplier ($ 240,000 * $ 12 2,880,000

 

The company will pay the supplier 240,000 dollars on the payment date

 

The dollar rises or falls, the supplier must take the 240,000 dollars

 

But in the company’s ledger, the purchase process must be recorded in Egyptian pounds, the exchange rate at the date of purchase.

At the end, the documentary credit in inventory or fixed assets must be closed.

And the entry:

 

2880000 accounts / inventory or fixed assets, whatever the purchase 2,880,000

 

      To

Accounts / documentary credits 2,880,000

 

 At the end of the year on 31/12, an evaluation of the cash balances and items is made, meaning any item, whether cash in dollars, a balance of indebtedness from customers in dollars, or a balance of debt owed to suppliers in dollars that must be re-evaluated as long as it is in a foreign currency and has not been settled

 

In this example, until now, the supplier's balance has not been paid until the end of the year, which is $ 240,000, so I must re-evaluate the supplier's balance

 

At the end of the year, we found the dollar exchange rate is 13 pounds

What is the solution now?

 

I was evaluating the stock based on the price of 12 pounds, and now the price is 13

 

Should I re-evaluate the stock again? Of course not

 Because inventory and fixed assets are non-monetary items that are not revalued at the end of financial periods

What about the supplier?

 

I was evaluating the balance of the resource I have in my books at 12 pounds

 

Of course, as I said, the supplier takes money in dollars, the price, whether it rises or decreases, the price is paid to the supplier in dollars. I didn't specify yet anything for the supplier, and therefore I have to make a re-evaluation according to the exchange rate on the closing date.

 

 

In order to evaluate the Liabilities' for the supplier in Egyptian pounds

I was a resident of 12, and now in the dollar is 13

So there difference in the debit currency, because the Liabilities that I have increased by the value of one pound in each dollar.

Mean 1 x 240,000 = 240,000 pounds...That

 

Assuming, for example, the dollar became 10 in the closing date

 

So, there are differences in the creditor currency, because the liabilities' that I had decreased after I had calculated it at 12 pounds Now I will calculate it on the basis of ten pounds

 The entry in the first case was the price of the dollar at the end of the year it become 13 pounds.

I will increase the value of liabilities' I have to the supplier. It remains normal for the supplier to increase the balance of the supplier by the value of the difference between the exchange rates

 

Means 1 pound x 240,000 = 240,000

 

The entry becomes at 12-

Learn about the accounting treatment for currency valuation differences from Accflex

 

 Standard for changes in exchange rates (currency valuation differences) Egyptian Standard No. 13 and International Standard No. 21

 

Before starting our topic, we must know some specific concepts related to the topic

 

Transaction currency: It is the currency that is dealt with in the country in which the company deals, such as the pound in Egypt and the riyal in Saudi Arabia

 

Exchange Difference: The difference resulting from converting a specific currency unit into other currencies at different exchange rates

 

For example, if 1000 dollars is converted into 10,000 Egyptian pounds, meaning that the exchange rate = 10 dollars

 

Terms you should know before evaluating currency differences

 

Spot price: the exchange rate for immediate delivery, meaning the exchange rate at the time of buying or selling (the first measurement).

 

Closing price: the exchange rate on the date of preparing the budget, meaning the price on 31/12 (subsequent measurement).

 

Presentation currency: the currency used in preparing the financial statements, the currency of preparing and displaying the lists, meaning another currency in which the events are translated into the (measurement currency...)

 

How to record transactions

 

Transactions that take place in a foreign currency are recorded at the spot exchange rate on the date of the exchange, and transactions that take place in a foreign currency are recorded in the books of your company at the spot exchange rate on the date of the exchange or by using an average exchange rate if the fluctuation in the exchange rates is slight, meaning the monthly average; The best is the immediate exchange rate, which means any exchange rate on its date

 

Appearance, of currency differences.

 

We can say that any event in a currency other than the presentation currency requires us to convert the foreign currency into the presentation currency (at the time of the event and on the date of preparing the financial statements). This appears in cases where your company is buying or selling to foreign clients or suppliers. It also appears if you are the opening of a foreign currency account in your country; and therefore the differences in currency valuation may appear at the end of the financial period while you are doing the evaluation of bank balances, It is also possible that the differences in the valuation of a currency appear if you, as a company, have subsidiary companies to you or his brother's companies in other countries, and therefore when there are transactions with these companies, the differences in the valuation of the currency appear, and we will see this with an example.

 

Currency Offer

 

There are a range of factors that determine what is the Currency Offer

 

The currency in which the company sells, meaning that it imports cash through it  1-

 

2- The currency which payment is performed through .

 

. 3- The currency of the country in which they are handle

 

Monetary and non-monetary items:

 

Monetary items: the cash uniform, whether in the warehouse, current accounts, clients, suppliers, loans and bank facilities, are reassessed at the end of any financial period if there is a balance left in it, meaning if the company owes the supplier in dollars and has not been repaid, an assessment of the supplier's balance is done at the end of the Financial period, and The same for customers and cash balances.

 

Non-cash items: such as inventory, fixed assets, intangible assets, prepaid expenses, are not subject to any revaluation.

 

Differences of Earned and Unearned currency

 

It means that the process has been settled, as we made invoice a foreign customer, this invoice was valued at 50,000 dollars, the dollar was 15 pounds, but the customer paid it on 20/12 and the dollar was 17.

 

Of course, there will be differences in the currency, but these differences are considered achieved because the sale process has been settled and ended.

 

Assuming that the payment process took place after the end of the financial period, and because he is a foreign customer of course, he still owed his debts in dollars, but I had valued the dollar in my books during the sale process at 15,

 

And the dollar is now 17, so I will make an evaluation entry on the new price, and this currency difference is considered its working difference Unearned.

 

The whole idea in this part is the earned currency difference and the unearned currency difference.

 

These will appear more in the topic of the cash flow statement

 

Together, we will see very many examples of debit and credit currency differences and revaluation of balances.

 

 

An example of an accounting treatment for currency valuation differences

 

A company working in the iron field imports 240 tons of ores, the price per ton is 1000 dollars from the supplier x and has opened a documentary credit in the National Bank

 

 

According to the terms of opening the credit with the supplier (suppliers' facilities) Supplier facilities 90 days, meaning payment to the supplier after 90 days from the date of shipment

 

The accreditation was opened on 11/20/2004, the accreditation number 814/2004

 

I understood that I will not transfer the money to the supplier until 90 days after the date of shipment of the goods and the date of shipment of the goods 5/12/2004

 

The documentary credit will be according to the terms of your contract with the bank

 

If this means that the loan facilities account (current debit) of the company with the bank is one of the conditions of the contract.

 

The company covers 10% of the credit value (meaning the company pays 10% of the credit value, and the bank covers you 90% of the credit value (meaning the bank pays 90% of the credit value to the supplier, and of course the company will return it pays the second amount of the loan with interest at specific dates according to the terms of the contract) This is, of course, if you have a credit balance available at the bank, but In case there is no credit balance, so here you must provide the full value of the credit

 

  And it is possible that the bank covers you with all the credit from the loan facilities account according to your agreement with the bank and according to the company's facilities contract with the bank and according to what is available to you in your balance in the facility account as well.

 

. It is also possible for the supplier to request 10% or any down payment and the rest to be facilitated by suppliers

 

In other words, this issue will be according to the agreement, whether with the bank or with the supplier

 

On the date of opening the credit 11/20, the exchange rate was 10 pounds

 

First, the value of the credit in dollars = 240 tons * 1000 = 240,000 dollars

 

Like what we say, the conditions of accreditation are that it contains 10%. As a company, I pay them from my account

 

Whether my accounts are in Egyptian pounds, or open an account in dollars in the bank, because the bank deducts them from the dollar account.

 

If I have an account in Egyptian pounds, the 10% value will be deducted from the exchange rate on that day

 

 

But, suppose I don't have dollars, but I have the balance in Egyptian pounds

 

The price of the dollar today was 10 pounds

 

To be deducted = 240000 * 10% * 10 pounds = 240000

 

Accounts / letters of credit 240,000

 

                To

 

National Bank account / current or cash 240,000

 

This is a value of 10% cash cover from adopting a number as well as deducted from the current account, so the remaining 90% of the credit value, as we said; the company has opened a facility contract from the bank that can finance you the credit in the form of loans against interest. We assume that you pay the bank every 120 or 90 days

 

. According to the terms of his contract with the bank, meaning the bank will pay me to the supplier on 3/5/2005, and I will pay to the bank, of course, 120 days after the bank pays the value of the credit to the supplier according to the terms of the contract with the bank

 

The idea is important, and this is important for the accountant. Banks are more important than the entries, and these are simple things

 

So, I will have two dates

 

The date of payment to the supplier (the bank has to pay it to me according to the terms of credit)

 

The date of the loan payment to the bank

 

  The amount of credit, which the bank pays to suppliers in the company, is in the form of short-term loans with duration of 60, 90 or 120 days, and of course the interest is calculated day by day.

 

The value of the loan must be paid within the granted period according to the terms of opening the facility contract; otherwise the company will be charged a fine and higher interest according to the terms of opening the loan facility with the bank

 

The goods entered my store on 12/20 and the exchange rate was 12 pounds

 

So I'll make an accrual entry for the supplier

 

The value of the message is in dollars, of course, without clearance costs, etc.

 

  12$ = 2880000    × 240,000

 

 

 

The entry:

 

Accounts / documentary credits 2,880,000

 

(accounts / foreign supplier ($ 240,000 * $ 12 2,880,000

 

The company will pay the supplier 240,000 dollars on the payment date

 

The dollar rises or falls, the supplier must take the 240,000 dollars

 

But in the company’s ledger, the purchase process must be recorded in Egyptian pounds, the exchange rate at the date of purchase.

 

At the end, the documentary credit in inventory or fixed assets must be closed.

 

And the entry:

 

2880000 accounts / inventory or fixed assets, whatever the purchase 2,880,000

 

      To

Accounts / documentary credits 2,880,000

 

 At the end of the year on 31/12, an evaluation of the cash balances and items is made, meaning any item, whether cash in dollars, a balance of indebtedness from customers in dollars, or a balance of debt owed to suppliers in dollars that must be re-evaluated as long as it is in a foreign currency and has not been settled

 

In this example, until now, the supplier's balance has not been paid until the end of the year, which is $ 240,000, so I must re-evaluate the supplier's balance

 

At the end of the year, we found the dollar exchange rate is 13 pounds

What is the solution now?

I was evaluating the stock based on the price of 12 pounds, and now the price is 13

 

Should I re-evaluate the stock again? Of course not

 Because inventory and fixed assets are non-monetary items that are not revalued at the end of financial periods

What about the supplier?

 

I was evaluating the balance of the resource I have in my books at 12 pounds

 

Of course, as I said, the supplier takes money in dollars, the price, whether it rises or decreases, the price is paid to the supplier in dollars. I didn't specify yet anything for the supplier, and therefore I have to make a re-evaluation according to the exchange rate on the closing date.

In order to evaluate the Liabilities' for the supplier in Egyptian pounds

 

I was a resident of 12, and now in the dollar is 13

 

So there difference in the debit currency, because the Liabilities that I have increased by the value of one pound in each dollar.

Mean 1 x 240,000 = 240,000 pounds...That

 

Assuming, for example, the dollar became 10 in the closing date

 

So, there are differences in the creditor currency, because the liabilities' that I had decreased after I had calculated it at 12 pounds Now I will calculate it on the basis of ten pounds

 The entry in the first case was the price of the dollar at the end of the year it become 13 pounds.

 

I will increase the value of liabilities' I have to the supplier. It remains normal for the supplier to increase the balance of the supplier by the value of the difference between the exchange rates

 

Means 1 pound x 240,000 = 240,000

The entry becomes at 12-31-

 

Accounts / Difference Debit - Income Statement 240,000

Accounts / supplier 240,000