Foreign Currency Transaction Question

[AlabamaCPA]

Hello Everyone,

I am new here but would like to ask a question.

When a US company imports goods from another country, they will issue a payable to the foreign factory or supplier usually denominated in the foreign countries currency. According to GAAP, a foreign exchange gain or loss should be recognized when the payment is actually paid at a different exchange rate.

Let's suppose however that the US company has an agreement with the foreign factory or supplier to settle the invoice according to the exchange rate in effect on the invoice date, NOT the day that it is actually paid.

Can a US company do this and still be in accordance with GAAP? The US company would basically be paying the factory the same US $ amount that was originally entered into the accounts payable account even though payment is settled months afterward.

Also, I need to put something together for a meeting so if anyone could point me to some specific guidance or publication it would be greatly appreciated!

THANK YOU VERY MUCH

 

[bklynboy]

What US GAAP requires is that the difference between billed and settled amounts in a FX currency be recognized as a transaction gain or loss. In your case there is no difference to the US Company so no gain or loss is required (assumes they already had the foreign currency on hand to settle). This complies with US GAAP. Its actually quite common to have these type of arrangements and the party at risk would possibly enter into a forward exchange contract to hedge the exposure.

It is the supplier that now bears the risk.

 

[AlabamaCPA]

Thank you very much!

I know the FASB 830 - 20 - 30 -1 states:

"At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured in the functional currency of the recording entity by use of the exchange rate in effect at that date."

I did not know if the presence of a contract/agreement would preclude the US company from using the current exchange rate to pay an invoice.

 

[bklynboy]

If you think about it what the contract is doing is its fixing the cost at the buyer's currency since the buyer pays a known price in its currency regardless of the movement of exchange rates. This is not a true FX transaction since the buyer knows exactly what it will pay and the supplier absorbs the risk.

 

[Counterofbeans]

bklynboy is correct.

Don't make it harder than it is. The cash flows appear to be the same throughout the entire transaction, so it really is a non-issue.

Ultimately, there are up to four dates that one could ultimately consider when recording a foreign currency transaction, particularly when receiving goods/services. They are: (1) Date in which the goods/services are received (on this date, you have to record a payable in your GL), (2) Date the invoice is received (it's possible that the rate is different than the rate used in (1), (3) Date of financial reporting (if this is in between the received date and the payment date, you need to adjust these types of payables to the current rate) and (4) Date of payment (fairly obvious, need to send the right amount of $$$).

I'd be prepared to respond to any challenges regarding the dates above, but I'd simply make the argument that there is no foreign currency risk, so I'm not adjusting the payable at all. You shouldn't have any problems.