Dont miss to recognise Foreign currency (FY) exchange Loss/Gain in your Books
November 10, 2023
By - Manik Balami
As a business owner, you know that foreign currency transactions can be a valuable way to expand your reach and grow your customer base. However, it is important to be aware of the risks associated with foreign currency exchange (FCY) volatility.
When you conduct a foreign currency transaction, you are essentially exchanging one currency for another. The value of these currencies is constantly fluctuating, so there is always a risk that you could lose money on the exchange rate. For example, if you invoice a client in euros and the value of the euro falls relative to the US dollar, you will receive fewer dollars when the client pays you. This is known as a foreign currency loss.
Such losses of gain need to be booked in accounts which might be shown mostly by small or mid-sized companies which can have bigger impact on future with legal liabilities.
As we showed in our deck ( link below for reference) in the case of loss from Exchange of FCY,
Foreign Currency Exchange losses A/c Dr NPR 150,000.00
Client A/C Cr NPR 150,000.00
Additionally, Foreign currency losses can have a significant impact on your bottom line. In fact, according to a recent study by the Association for Financial Professionals, FX volatility cost US businesses over $100 billion in 2022 (Recommend due diligence for personal uses).
If your business conducts foreign currency transactions, it is important to closely monitor FCY markets and take steps to protect yourself from FCY volatility. Here are a few tips:
- Understand your foreign currency exposure. The first step is to understand your company's foreign currency exposure. This means identifying all of your assets and liabilities that are denominated in foreign currencies.
- Develop a hedging strategy. Hedging is a technique that can be used to lock in an exchange rate for a future transaction, thereby reducing the risk of adverse exchange rate movements. There are a number of different hedging strategies available, such as forward contracts, futures contracts, and options.
- Diversify your currency risk. Diversifying your currency risk means doing business with clients and suppliers from a variety of countries, and accepting payments in multiple currencies. This can help to reduce your overall exposure to any one currency.
- Use multi-currency accounting. Multi-currency accounting can help to simplify your financial reporting and make it easier to track your FCY gains and losses. This can be particularly helpful if your company operates in multiple countries.
By taking these steps, you can help to protect your company from the risks of FCY volatility and improve your overall financial performance.
With some real cases ( Recommend Due diligence for personal uses).
Listed Companies:
- Tesla: In 2021, Tesla lost $506 million due to FCY fluctuations. This loss was primarily due to the depreciation of the Chinese yuan relative to the US dollar.
- Apple: In 2022, Apple lost $4.8 billion due to FCY fluctuations. This loss was primarily due to the depreciation of the euro and yen relative to the US dollar.
Non Listed Companies:
- British Steel: In 2019, British Steel lost £72 million due to FCY fluctuations. This loss was primarily due to the depreciation of the British pound relative to the US dollar.
Download PDF: https://speakerdeck.com/rudolph123/dont-miss-to-recognize-foreign-currency-fy-exchange-gain-in-your-books
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Disclaimer: Any decision based on the contents shall be taken subject to proper guidance from Financial or legal Advisors before taking any decisions.
