USD on Balance Sheet

[Brizza]

This is probably more of a general accounting question but I'll ask it anywayz.

If you are dealing in USD and on your balance sheet you have an Accounts Receivable account for USD transactions (but it has already been converted to AUD - Say $1,000AUD).

If you don't receive payment on that sale for say six months (being in $USD) and there is a big change in exchange rates from when the purchase took place to when the transaction was paid, then the figure on the balance sheet at the moment won't entirely be accurate because it is a false representation of the value of the asset as as of the current day, (ie: it is no longer worth $1,000AUD if payment was to be received today, it may be worth $500AUD).

In terms of proper Accounting theory, what is the correct way to account for this? As if you were preparing a balance sheet as of today, my understanding of the balance sheet is that it was supposed to show an accurate overview of assets and liabilities as of the current day.

 

[davea]

According to Australian Accounting Standards at the day the balance sheet is created all foreign currencies have to be presented in the presentational currency of the company (ie AUD). (AASB 121.8) The translation will result in a different AUD amount each time. This difference is to be taken directly to an equity reserve (not to initial capital and not retained profits). When the receivable is received a gain will go to the P&L (AASB 121.28). If you have made money from the fx movement you should have a credit balance if you have lost money it will be a debit (in the equity account). Say your receivable was last week with the USD at $0.98 for $1000 USD. ($1020 AUD)
Dr Accounts Receivable $1020
Cr Sales $1020
(there would also be the cogs & inventory entry)

You convert the balance today and the USD is 0.90. Today it is worth $1,111. So the journal entry will be
Dr Accounts Receivable $91 (Balance Sheet Account)
Cr Foreign Currency Translation Reserve (FCTR) $91 (Equity Account)

Now lets say you collect the money tomorrow and the fx rate is still 0.90. The Journal entry will be
Dr Cash $1,111 (Balance Sheet Account)
Cr Accounts Receivable $1,111 (Balance Sheet Account)
Dr FCTR $91 (Equity Account)
Cr FX Gain $91 (P&L Account)

These entries are in accordance with AASB 121 and will be the opposite if the entries were a payable....

Hopefully this helps (might be a bit to detailed though)

 

[Brizza]

Cheers for the response.
So when the initial sale is done, say it is recorded on the balance sheet as
FX Acc. Rec. $1,000AUD based on exchange rate of say $1USD = $1AUD


If in 6 months time, I make a balance sheet and the payment has not yet been received so it is still in FX Acc. Rec. but the rate is now $1USD - $0.90AUD, should the balance sheet be adjusted to show FX Acc. Rec. $900 based on the exchange rate of that day or remain at $1,000AUD based on exchange rate of when the transaction occurred?

 

[davea]

the fx acc rec should be adjusted with the difference going to the P&L as a gain or loss

 

[Brizza]

Thanks again.

Is the gain/loss only shown on the P&L when the payment is actually received?
If that is correct, beforehand any gain / loss is taken to the FCTR equity account?

Reason asking is if the balance is sitting in FX Acc Rec and I make say six balance sheets before the payment is received, each time the adjustment (due to exchange rate fluctuations) should be cr / dr the FCTR account depending on whether it was a gain or loss?

Does that sound right?

 

[davea]

Thanks again.

Is the gain/loss only shown on the P&L when the payment is actually received?
If that is correct, beforehand any gain / loss is taken to the FCTR equity account?

Reason asking is if the balance is sitting in FX Acc Rec and I make say six balance sheets before the payment is received, each time the adjustment (due to exchange rate fluctuations) should be cr / dr the FCTR account depending on whether it was a gain or loss?

Does that sound right?

Yep correct....

It shouldnt be a gain in the P&L until its realised (ie you recieve the money) until then it sits in the equity account...

It was designed this way so there wasnt large variables moving through the income statement and hence adjusting the profit.. Big business dont like variarble income statements..

 

[Brizza]

Too good.

Thanks a bunch for your help