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Former Member

Large unrealized gain/loss on foreign currency bank account

Posted on May 03, 2011 at 09:44 PM 231 Views

Hi,

We have a Brazil company with a bank account in BRL currency. Group currency is USD. Exchange rates are maintained as are other settings required for currency exchange valuation and F.05 revaluation. G/L account for the bank is NOT open item managed. Revaluation is at month end on cumulative balance. BRL to USD conversion rate currently around 0.61.

Here's the issue. We have a large F.05 unrealized forex gain/loss every month, and USD balance is currently much larger than BRL balance. This is due to changes in exchange rates between when the bank account was funded (higher forex rate) and when payments were made (lower forex rate). We've been carrying this large unrealized gain/loss for a few years now. Our accountants want to realize some or all of the unrealized gain/loss. How best to do that?

Thanks

Steve

FIN (Finance)
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1 Answer

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    Former Member
    Posted on May 04, 2011 at 03:01 AM

    Hi Steve,

    When your customer pays to bank it is no more unrealzed and become realized exchange rate difference which get posted autmatically to loss or gain on exhcnage rate realization account.

    As far is unrealzed gain loss goes each month you revaluate it (i.e. on key date) and on next day (i.e. Key date+1) it gets reversed, therefore it is valuated only for reporting purposes.

    Hope this clarifies.

    Thanks!!!

    Murlidhar Khatri

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    • Former Member
      May 04, 2011 at 02:10 PM

      Hi Murlidhar,

      Thank you for the response. Yes, I understand that a gain/loss can be realized based on exchange rate differences between when invoice entered/posted and when paid. That's only part of the gain/loss in minds of the accountants. The other part is gain/loss from time that cash was put into bank account. For example, we spend $100 USD to purchase and deposit R$167 BRL into Brazil bank account. Three months later that same R$167 BRL is worth only $85 USD. At that time we post and pay Brazil invoice on same day in amount of R$167 with no exchange gain/loss on the invoice. System posts credits of R$167 BRL and $85 USD to bank account G/L account. System does not record gain/loss on payment because invoice currency translation date and paid date are same. However, the bank account G/L account balance now reflects R$0 BRL and $15 USD on which system calculates a $15 USD unrealized gain/loss at month end. This unrealized gain/loss on the bank G/L account posts and reverses each month just as you said but never goes away. In minds of accountants the $15 USD gain/loss should be recognized. How best to recognize the $15 USD gain/loss, that is the question.

      Thanks

      Steve