What is Foreign Currency Accounting?
Foreign currency accounting is the process of recording transactions in currencies other than the entity’s functional currency and translating foreign operations into the presentation currency. IAS 21 prescribes the exchange rates and the treatment of resulting differences.
How It Works
- Identify the functional currency of the entity and each foreign operation.
- Record foreign currency transactions at the spot rate on the date of the transaction.
- At each reporting date, translate monetary items at the closing rate and non-monetary items at historical or fair value rates.
- Recognise exchange differences in profit or loss, except for those arising from foreign operations which go to other comprehensive income.
Saudi Context
The Saudi Riyal is pegged to the US Dollar at SAR 3.75, so USD transactions carry low FX risk for most Saudi entities. However, transactions in EUR, GBP, and other GCC currencies must follow IAS 21 with rates published by SAMA. ZATCA accepts the translated amounts in zakat and tax filings.
Example
A Saudi company buys equipment worth EUR 100,000 when the EUR/SAR rate is 4.10 (cost SAR 410,000). At year-end the rate is 4.20 and the payable is still outstanding. The SAR 10,000 unrealised exchange loss is recognised in profit or loss.