In this competitive global market, many companies depend on the international markets for acquiring and selling their goods and services. However, within the corridors of the international market lies foreign currencies and exchanges. How then should a US company with US dollar denominated currency records transactions from a foreign denominated currency? The accounting process behind foreign currency is addressed by ASC 830.

ASC 830 addresses foreign currency transactions, translations and remeasurement. However, this blog will address foreign currency transaction with particular focus on acquisition of products, thus Accounts Payable.

From the acquisition of goods and services perspective, there are three stages in the transaction accounting processing:

  1. Initial acquisition date
  2. Balance Sheet date
  3. Settlement date

For illustration purposes, XYZ Corporation (a US Corporation) purchases materials from a supplier in Germany on February 7, 2023, for 15,000 Euros. XYZ Corporation’s balance sheet date falls on February 24, 2023, and the transaction was settled on March 1, 2023. The follow spot rates were recorded:

  • February 7, 2023, 1Euro = $1.07
  • February 24, 2023, 1Euro = $1.05
  • March 1, 2023, 1Euro = $1.06

XYZ will make the following entries:

At the acquisition date: Feb 7, 2023

  • Inventory $16,050 (15000 Euro x 1,07)
  • Accounts Payable $16,050

Balance Sheet date. Feb 21, 2023: Accounts Payable $15,750 (15000 Euro x 1.05), Gain/Loss on foreign exchange $300 ($16,050-$15,750)

  • Accounts Payable $300
  • Gain on Foreign exchange $300

Settlement date March 1: $15,900 (15000 Euro x 1,06), Gain/Loss on foreign exchange $150 ($15,750-$15900)

  • Accounts Payable $15,750
  • Loss on Foreign exchange $150
  • Cash $15,900

We will continue the next blog on currency translation and re-measurement of foreign currency.

For additional information, contact MIBAR.

Additional Resources

How to Setup the Multiple Currencies Feature in NetSuite

Improving Intercompany Accounting: Examples, Challenges, and Steps