Glossary

Foreign exchange gain or loss

Definition

A foreign exchange gain or loss is the change in the base-currency value of a foreign-currency item caused by a movement in exchange rates between the date it was recorded and the date it is settled or remeasured. Realised differences arise on payment; unrealised differences arise when open monetary balances are retranslated at the closing rate.

How it works

Suppose you owe a supplier in a foreign currency. If your base currency weakens before you pay, you need more of it to settle the same invoice and you book a loss. If it strengthens, you book a gain. Receivables work the other way round.

At each reporting date, monetary items still open are retranslated at the closing rate and the difference goes to profit or loss as an unrealised gain or loss. When the item is finally paid, the difference between the last carrying amount and the cash actually paid or received is the realised part. IAS 21 recognises both in profit or loss, except for specific cases such as net investments in foreign operations.

Keep FX differences in dedicated accounts, separate from sales and purchases, so margins are not distorted. The multi-currency accounting guide walks through revaluation entries step by step.

Formula

FX difference = Foreign amount × (Rate at settlement or closing - Rate at recognition)

Example: paying a supplier after the rate moved

A EUR-based company receives a 5,000 USD invoice when 1 USD = 0.90 EUR and records a payable of 4,500 EUR. It pays a month later when 1 USD = 0.93 EUR, costing 4,650 EUR.

Example: paying a supplier after the rate moved
Account	Debit (EUR)	Credit (EUR)
Trade payables	4,500
Foreign exchange loss	150
Bank		4,650

Related terms

Exchange rate
An exchange rate is the price of one currency in another, used to convert a foreign-currency amount into the base currency on a given date.
Base currency
The base currency is the currency a business keeps its books and reports in. Entries in other currencies are converted to it with an exchange rate.
Income statement (profit and loss)
The income statement reports revenue, expenses and the resulting profit or loss for a period. Presented by function, it shows revenue, cost of sales, gross profit, operating expenses and net profit.
Adjusting entry
An adjusting entry is recorded at the end of a period to bring balances up to date, for example accrued expenses, prepaid amounts or depreciation. It makes the statements follow the accrual basis.

Guides

Multi-Currency Accounting: Exchange Rates, FX Gains and Losses, and Base Currency

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FAQ

Questions about Foreign exchange gain or loss

Is an unrealised FX gain taxable?

That depends on the tax law where the business is resident. Some countries tax unrealised differences as booked, others only when realised. Check local rules or ask a tax adviser.

Where do FX gains and losses appear in the income statement?

Usually under other income and expenses or finance income and costs. Choose one presentation and apply it consistently from year to year.

Put the terms to work

Post a balanced entry, run a trial balance and close a year in a real ledger. New accounts get free credits to get started.

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