Revaluation of Foreign Currency Accounts: Understanding Exchange Rate Gain or Loss

Businesses dealing with foreign currency transactions must periodically adjust their financial records to reflect exchange rate fluctuations. This process, known as foreign currency revaluation, ensures that financial statements accurately represent the value of foreign currency accounts in the company’s base currency.

For simplicity, we'll use the example of:

• A foreign currency account in EUR
• A local currency of SAR.

This article explains how to record exchange rate gains or losses when revaluing a foreign currency account at period-end (unrealized gain/loss)

Example: Revaluing a EUR Account at period-end

Let's say your FCY account holds 1,500 EUR in balance.

Let's also assume that the exchange rate up to the period-end was 4.0 SAR/EUR and did not fluctuate resulting in a SAR balance on your books of 6,000 SAR

Now, at year-end, the exchange rate jumps to 4.5 SAR/EUR

• The updated BCY value of the account is 1,500 x 4.5 = 6,750 SAR
• The difference (6,750 - 6,000 = 750 SAR) is an unrealized foreign exchange gain

Since this is an unrealized foreign exchange gain, it is recorded in the Exchange Gain or Loss (P&L) account, as accepted by GAAP and IFRS:

Effect: The EUR bank account’s SAR value is updated to reflect the latest exchange rate.

And that's how you can revalue an FCY account. It is recommended to do this for all FCY accounts at the end of each accounting period.

By properly recording foreign currency revaluations, businesses ensure accurate financial reporting and compliance with accounting standards. If you need help applying these transactions in Wafeq, feel free to reach out!