Foreign exchange accounting

Foreign exchange accounting - is an accounting concept that describes reporting all the company’s transactions in currencies different from their functional currency.

Companies working with foreign currencies are required to report their transactions in their financial statements in their functional currency, using the daily spot exchange rate.

Sometimes there may be a substantial time gap between the transaction time – the moment when the firm commits to a transaction and the payment is settled.  When the exchange rate changes between the original transaction time and the settlement date, there is a gain or loss on the exchange.