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This year has seen a lot of instability in foreign exchange market in our country. Foreign currency transaction and the exchange rate were some of the reasons. The major international currency in the recent year has been US dollar, British pound, European euro and Japanese Yen etc. By the end of the last year dollar began to fall but now it is getting stronger.
If anybody wants to understand the complex function of the multinational enterprises or export-import companies one must first understand the organisation and dynamics of the foreign exchange market.
Before one understands foreign exchange market, one should discuss foreign exchange rate-'An exchange rate is the amount of one currency that must be given to acquire one unit of another currency usually for delivery to be made two business days later. It is called spot rate. The forward market is action in the forward market 30 to 180 days into the future. The forward rate is a contract rate between a foreign currency trader and client for future sales or purchase of foreign currency. Where this spot exchange rate and forward exchange rate occurred is called spot market and forward market respectively.
Foreign currency
transaction
Now the issue of foreign currency transaction. 'Foreign currency transactions are transactions denominated in a currency other than, the reporting currency of the firm. The reporting currency is the currency in which the firms' financial statements are issued. For example, sales by a Bangladeshi company or firm to a US firm for which payment is to be required in US dollar is considered to be foreign currency transactions for the Bangladeshi company. If the payment is to be received in Bangladeshi taka the transaction would not be a foreign currency transaction. We also know that foreign currency transactions may involve the buying and selling of goods and services, the borrowing or lending of funds and the receipt or payment of dividends.
Accounting problems arises when a transaction is denominated in a foreign currency, which the firm needs to resolve. These are - firstly, the transaction needs the initial recording of the transaction. Secondly, the recording of the foreign currency balances at subsequent balances dates and, thirdly, it is the treatment of any foreign exchange gain or losses. Fourthly, it is the recording of the settlement of foreign currency receivable and payables where they come due.
The monetary component and the non-monetary component are the common issue of any foreign currency transactions. Suppose a Bangladeshi company purchases equipment from a foreign country, the monetary component would be cash or account payable and the non- monetary component would be the equipment. The four problems mentioned above, may be categorised through these major combinations in the purchase of equipment (1) Two transactions recognise gain or losses (2) Two transactions defer in gain and losses and (3) One transaction recognises gain or losses.
For recording the equipment and accounts payable at the spot rate on the transaction date, it is the first and common approach. This transaction has two parts: the purchase of the equipment and the decision to finance through an accounts payable rather then by paying cash immediately at the subsequent balance date. The equipment retains its historical cost but the accounts payable value changes to reflect the new spot rate. Any difference between the previous and new spot rate is gain or losses recognised in the current accounting periods. And the second approach varies from the first in the gain or loss is deferred until the liability is finally settled. Thus the gain or loss is recognised only at the settlement date and the assertion is that the exchange rate moves up and down so it is better to wait until the settlement date to reflect the net gain or loss rather than have unrealised gain in one period eliminated by losses in the next. The last and the third approach is that one transaction recognises gains or losses -- the equipment and accounts payable account are intertwined. Suppose a change on one accounts is reflected by a change in the other. If the liability increases in the value of the exchange rate change, the equipment would also increase in value. If the loss arises from the increased value of the liability, it would be reflected by a higher asset value that would be depreciated over the life of the asset rather than in the period in which the exchange rate changes.
International accounting standards
The first time that the IASC dealt with foreign exchange issues was in international accounting standard 21 (IAS-21), titled 'Accounting for the effects of changes in foreign exchange rate' issued in March 1983. In the context of accounting for foreign currency transactions, IAS-21 provides more options than does statement 52. IAS-21 recommends the immediate recognition of foreign exchange gain or losses for most situations, as does statement 52.
1. 'The gain or loss on a long term foreign currency monetary items (such as long term debt) can be deferred and written off on a systematic basis over the life of a monetary item. 2. The gain or loss resulting from a severe devaluation that affects the value can be used to adjust the carrying value of related asset and written off over the life of the assets as long as the adjusted amount does not exceed the lower of replacement value or net realised value.'
Later IASC issued exposure draft 44 in 1992.
In the context of Bangladesh, accounting for foreign currency transactions is most important for its spot and forward exchange market and also important for monetary and non-monetary component. On the other hand, it is also important for Bangladeshi importer-exporter accounts for their foreign currency transaction.
The writer is sub-editor, Daily Ajker Kagoj
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