Company ABC, located in Romania, sells IT services to a German client of 1000 euros, on December 10th, 20X6. The German client paid on January 17th, 20X7 as the contract requires.On December 10th, 20X6 the exchange rate was 4.57 lei/euro, on December 31st, 20X6, it was 4.66 lei/euro and on January 7th, 20X7 it was 4.60 lei/euro.
The presentation currency is “lei” and the functional currency is “euro”; therefore, ABC Company should convert its euros transaction into lei, at the selling moment, at the balance sheet moment, and at the cash-in moment.
On December 10th, 20X6 the ABC Company (the seller) records the sale in its books as follows: 1000 euro of sale at 4.57 lei/euro
4570 lei Account receivable = Revenues from sale 4570 lei
On December 31th, 20X6 there is a potential gain in lei because the exchange rate has increased to 4.66 lei/euro. The claim now amounts to 4660 lei, compared to 4570 lei. The foreign exchange conversion has therefore created a difference of 90 lei:
90 lei Account receivable = Gains from foreign exchange conversion 90 lei
On January 17th, 20X7 the ABC Company receives 1000 euros equivalent to 4600 lei, 60 lei less than in December 31st, 20X6. Therefore, the entry is as follows:
4660 lei % = Account receivable 4660 lei
4600 lei Bank account
60 lei Losses from foreign exchange conversion
Another example relates to the ABC Company purchasing some consultancy services from a French supplier of 2000 euros, in September 21st, 20X7 and paying in instalments, ½ on October 1st, 20X7 and the other ½ on November 30th, 20X7. The rates of exchange were the following:
September 21st, 20X7: 4.50 lei/euro
October 1st, 20X7: 4.55 lei/euro
November 30th, 20X7: 4.49 lei/euro
On September 21st, 20X7, the service purchased was worth 9000 lei (2000 euro * 4.50 lei/euro)
9000 lei Expenses with services = Account payable 9000 lei
On October 1st, 20X7 the first ½ in the amount of 1000 euro (at 4.55 lei/euro) was paid. A loss was incurred as a result of the foreign exchange conversion rate of 50 lei = 1000 * (4.55 lei/euro – 4.50 lei/ euro)
4550 lei % = Bank account 4550 lei
4500 lei Account payable
50 lei Losses from foreign exchange conversion
On November 1st, 20X7 the second ½ in the amount of 1000 euro (at 4.49 lei/euro) was paid. In this case, there was a favourable foreign exchange conversion rate of 10 lei = 1000 * (4.50 lei/euro − 4.49 lei/ euro).
4500 lei Account payable = % 4500 lei
Bank account 4490 lei
Gains from foreign exchange conversion 10 lei
Things change when there are non-monetary assets or liabilities in a foreign currency, as opposed to the monetary items (account receivables, account payables) previously explained. For example, a company paid 1 million euro for a plot of land in Austria and the presentation currency of the company is the Romanian “lei”. The plot of land should be disclosed at its rate of exchange in the moment of acquisition, assuming here it was 4.60 lei/euro. Therefore, 4,600,000 lei is the acquisition cost of the land and this amount remains unchanged at the year end, no matter the volatility of the rate of exchange. Only when the revaluation model is used for land the difference on rates of exchange between the acquisition and the revaluation moment should be accounted for.