Unrealised exchange difference.

[whatisaccounting]

Scenario:
Every quarter, Company A will make an revaluation on the foreign currency of their Trade Payable.

For example loss in exchange rate:
Dr Exchange difference (unrealised) $555
Cr Trade payables $555

Following quarter, Company A will reverse the revaluation made in the previous quarter and revaluation again.

Assuming it is a gain this quarter:-
Dr Trade payables $555
Cr Exchange difference (unrealised) $555
(Reversal of previous quarter revaluation)

Dr Trade payables $333
Cr Exchange difference ( (unrealised) $333
(Revaluation of current quarter's trade payables)

Can I check if the above procedure is correct?

Because currently, my client has a Exchange difference (unrealised) gain when it is expecting a loss. Mainly due to the reversal of Prior year's exchange loss in the first quarter of new Financial year.

Thanks in advance for help!

 

[bklynboy]

I thought trade items in FX are reflected in the P&L and not unrealized? What basis of accounting are you following? GAAP? IFRS?

 

[whatisaccounting]

Hi, the unrealised FX was being reflected in the P&L as at FY 20x3

In the first quarter of FY 20x4, Company A revaluate the FX in Trade payables by reversing the unrealised FX into FY 2014 P&L, then revaluate the FX in Trade payable using the quarterly-end rate.

 

[Triest123]

Hi, the unrealised FX was being reflected in the P&L as at FY 20x3

In the first quarter of FY 20x4, Company A revaluate the FX in Trade payables by reversing the unrealised FX into FY 2014 P&L, then revaluate the FX in Trade payable using the quarterly-end rate.

=> If the exchange difference (unrealised) $333 is the difference between the previous quarter's exchange rate and the current quarter's exchange rate and the A/P outstanding amount remain unchange, then (according to your approach) the A/P amount will be understated by $555.

Suppose you purchase EUR10,000 goods on credit at 1 Jan, and your functional currency is USD

1-Jan 31-Mar 30-Jun
A/P (EUR10,000) 1.05 1.1055 1.0722 ( Exchange rate 1 usd : Eur)
A/P in USD 10,500.00 11,055.00 10,722.00
Net effect
Exhange loss / (gain) US$555.00 US$(333.00) US$222.00

In 1st quarter, an exchange loss of USD555 is recorded while an exchange gain of USD333 is recorded in 2 nd quarter. The A/P amount at 30 Jun is USD10,722

According to your approach, the A/P amount at 30 Jun (per your accounting entries)
is (10500+555-555-333) = USD10,167 (i.e. understated by USD555)