USA Revenue transactions in non-functional currency

[bnolan90]

Hi all,

It has always been my belief that contracts with customers denominated in non-functional currencies have revenue amount that are fixed at the current rate when the agreement is signed. Invoices are issued at the same rate that the contract was signed at (ensuring that final revenue and invoicing will match the original contract value). AR, Unbilled, and Deferred revenue are remeasured quarterly with the difference being recorded to unrealized G/L. As cash is received, the unrealized amounts will be reversed, and the realized G/L will be recorded as the difference between the historical contract rate the cash received. However, I am going through an ERP implementation and the process our implementation partners have described directly contradicts my current understanding. I have tried researching and have not found what I consider to be concrete examples one way or the other and would greatly appreciate any input.

Thanks,
Ben

 

[kirby]

Well, let's do an example:
Your books are in USD and your contract is in a nonfunctional currency. Let's say Euros.
Contract says you agreed on Nov 31, 2024 to sell your product for 200,000 Euros on Feb 15, 2025
On Nov 31, 2024 rate is $1.10 USD to one Euro
So your journal entry is
DR Accts Rec $220,000 USD
CR Sales Revenue <$220,000> USD

At year end you prepare financial statements and recalculate the contract:
12/31/24 rate is $1.15 USD to one Euro
So you have an unrealized gain of 200,000 euros times 5 cents. $10,000 USD
DR Accts Rec $10,000 USD
CR Unrealized FX gain <$10,000> USD
And your Accts Rec balance is now $230,000 USD

You get paid 200,000 Euros on 2/15/25.
2/15/25 rate is $1.11 USD to one Euro. Which is 1 cent more than at your original recording
200,000 Euros at $1.11 is $222,000 USD So your realized gain is $2,000 (200,000 Euros times 1 cent difference)
Right now your books show the receivable is $220,000 USD plus $10,000 USD = $230,000 USD So that needs to be adjusted to the actual $222,000 USD amount. Best is to remove the Unrealized Gain and record the Realized Gain.

DR Unrealized FX gain $10,000 USD
CR Realized FX gain <$2,000> USD
DR Cash $222,000 USD
CR Accts Rec < $230,000> USD

Questions?