A.4 Special Issues FX

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    Lynn Roden
    HOCK international

    Hello Mahesh Kalidas,

    The FASB’s Accounting Standards Codification Topic 830 specifies how foreign currency gains and losses are to be accounted for. You are inquiring about foreign currency transaction gains and losses, when a company buys or sells goods or services using a currency other than its own currency. Accounting for transaction gains and losses is specified in ASC 830-20-35-1 and 35-2.

    ASC 830-20-35-1 states:

    “A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes.” [emphasis mine]

    ASC 830-20-35-2 states:

    “At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity shall be adjusted to reflect the current exchange rate. At a subsequent balance sheet date, the current rate is that rate at which the related receivable or payable could be settled at that date.”

    ASC 830-20-35 goes on to list a few exceptions to the general rule. If you want to read what those exceptions are, you can read them in ASC 830-20-35-3 through 35-7 on the http://www.fasb.org website. In general, if other accounting standards require an unrealized gain or loss on a particular transaction that arises from some source other than foreign currency fluctuations to be reported in Accumulated OCI, then the related unrealized gain or loss from the foreign currency fluctuation should also be reported in AOCI. An example would be an unrealized gain or loss on an available-for-sale debt security that is reported in AOCI. But those exceptions listed there are the only instances when an unrealized gain or loss on a foreign currency transaction would be reported in AOCI. The general rule is both unrealized and realized foreign currency transaction gains and losses are recognized in net income.

    Although the US CMA exams focus on US GAAP, I also checked the International Financial Reporting Standards. International Financial Reporting Standards (IFRS) specify the same thing US GAAP standards do, in IAS 21, “The Effects of Changes in Foreign Exchange Rates,” Paragraph 30, which says this:

    “When a gain or loss on a non‑monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non‑monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.”

    Therefore, under both US GAAP and IFRS, any unrealized gain or loss resulting from foreign currency fluctuations related to trade accounts receivable or trade accounts payable is recognized in net income.

    I cannot comment on why the author of that website says something different, but I can say that what you saw there is not according to US or international generally accepted accounting principles.


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