How to Record Foreign Exchange Transactions

Posted by Olympia CGP on 7/20/21 6:52 AM

If you’re a Canadian company that makes regular cross-border payments, you know that accounting can sometimes be tricky, and that errors can cost your business money.

Whether your organization uses a Canadian dollar bank account or has both a Canadian and US dollar bank account, when purchasing foreign currency to settle bill payments (either through wire transfers, bank drafts or other ways), it’s imperative to understand how the floating exchange rate and your choice of accounting methods will impact your bottom line. 

In some cases it will be your accounting responsibility to both record the exchange rate on the day of the transaction as well as to “true up” the value of your U.S. dollars at the end of each month in order to have a more accurate prediction of monthly, quarterly or yearly profits. However, the manner in which you go about recording foreign exchange transactions will depend on the accounting policy you have chosen, and the nature of your business.

Furthermore, companies that do business outside of Canada are sometimes required to report foreign currency exchanges on their financial statements, which is governed in Canada by the Canadian Accounting Standards Board (AcSB), and uses International Financial Reporting Standards (IFRS). 

By understanding how to best record foreign currency transactions, you’ll be able to save your business money over the long term. Read on for more information on the subject, or reach out to experts that specialize in helping Canadian businesses manage their currency exchange and global payments needs. 

Foreign Currency Transactions

First, some basic information upon which to build.

What is a Foreign Currency Transaction?

A foreign currency transaction is defined as any financial transaction in which you make a payment or receive a payment in a foreign currency. 

What is a Floating Exchange Rate?

As the Canadian dollar drops relative to the U.S. dollar, any U.S. goods and services will become more expensive for Canadian businesses. Any time the reverse happens, those same U.S. goods and services will become less expensive, and count as a foreign currency gain.

Foreign Exchange Transactions: Gains and Losses

Not every transaction is settled on the same day as the original purchase, and when there is a difference in the foreign currency exchange rate between the original purchase and the settlement date, a company will experience either a foreign exchange loss or a foreign currency transaction gain.  

Errors in recording and timing those transactions properly can be costly. The best way to avoid any errors is to choose an accounting policy that makes the most sense in the context of your organization’s day-to-day business. However, it’s also very important to know that businesses have other options as well. 

For any companies that make a great deal of foreign currency transactions, there is the option of buying a forward currency contract, a method that can remove uncertainty related to volatility in the foreign exchange rate by securing a guaranteed rate. 

Companies like Olympia Trust Company specialize in managing global payments for Canadian businesses, and might have an excellent solution for your business that maximizes your foreign currency transaction gain while minimizing any foreign currency exchange pain.  

Accurate Accounting for Foreign Currency Transactions

No matter the size of your business, the following are the most common steps to take when calculating and recording a foreign currency transaction. 

Imagine your company has purchased a product from the United States and had it delivered to Canada. The machine costs $1,000 USD. 

  1. Translate the foreign currency costs in USD to Canadian dollars
  2. Don’t forget to record the exchange rate on the transaction date
  3. Calculate the exchange gain or loss for your accounting records

Note: Not all transactions are this simple. Different rules apply when dealing with something other than direct purchases, such as with exchanging stocks, assets of inventory. To speak to an expert today that specializes in foreign currency exchange issues for questions.

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