This appendix is nonauthoritative and is included for informational purposes only.
As discussed in paragraphs 1–2 of FASB Accounting Standards Codification (ASC) 946-830-45 each transaction denominated in a foreign currency can initially be measured only in that currency. The ongoing revaluation of investments and receivables or payables representing unsettled foreign currency transactions should be classified as unrealized foreign currency gain or loss. On settlement (when there is actual cash flow), a realized foreign currency gain or loss should be recorded. Any differences between originally recorded amounts and currently consummated or measured amounts in the reporting currency are a function of both of the following factors: (a) foreign exchange rate changes and (b) changes in market prices.
Illustrations A and B apply if separate disclosures of the foreign currency elements of unrealized and realized gains and losses on investments are chosen by the reporting entity.
A. Securities Purchases and Sales
As discussed in FASB ASC 946-830-45-20, if separate reporting of foreign currency gains and losses on sales of securities is chosen by the reporting entity, the realized fair value gain or loss on the sale of the security should be measured as the difference between the sale proceeds in foreign currency and the original cost in foreign currency translated at the spot rate on the sale trade date. The realized foreign currency gain or loss should be measured as the difference between the original cost in foreign currency translated at the spot rate on the sale trade date and the historical functional currency cost. Illustration A shows the calculation of the market and currency components of realized gains and losses on the sale of an investment.
ABC Fund uses US$ as its functional currency. | ||||
ABC buys 1,000 shares of XYZ @ £15.00 with a spot exchange rate of $1.75 = £1.00. | ||||
Foreign currency (FC) cost basis | = | £15.00 × 1,000 | = | £15,000 |
Functional currency cost basis | = | £15,000 × 1.75 | = | $26,250 |
Market gain/loss | = | (FC sale proceeds – FC cost) × foreign exchange (FX) rate on day of sale | ||
Currency gain/loss | = | FC cost × (FX rate day of sale – FX rate day of purchase) |
Assume a sale of 1,000 shares of XYZ @ £12.00 and $1.50 = £1.00: | ||||
FC proceeds | = | £12.00 × 1,000 | = | £12,000 |
Functional currency proceeds | = | £12,000 × 1.50 | = | $18,000 |
Market loss | = | (£12,000 – £15,000) × 1.50 | = | $(4,500) |
Currency loss | = | £15,000 × (1.50 – 1.75) | = | $( 3,750) |
Total loss | $(8,250) |
Proof | |
Functional currency proceeds | $18,000 |
Functional currency cost | $(26,250) |
$(8,250) |
As stated in FASB ASC 946-830-45-21, the sale of a security results in a receivable for the security sold. See illustration F for the calculation of realized gain/loss related to the change in a foreign currency denominated receivable for securities sold from the trade date to the settlement date.
B. Securities — Subsequent Measurement at Fair Value
As discussed in paragraphs 16–17 of FASB ASC 946-830-45, the fair value of securities should initially be determined in the foreign currency and translated at the spot rate on the purchase trade date. The unrealized gain or loss between the original cost (translated on the trade date) and the fair value (translated on the valuation date) comprises both of the following elements: (a) changes in the fair value of securities before translation and (b) movement in foreign currency rate. If separate disclosure of the foreign currency gain and losses is chosen, the changes in the fair value of securities before translation should be measured as the difference between the fair value in foreign currency and the original cost in foreign currency translated at the spot rate on the valuation date. The effect of the movement in the foreign exchange rate should be measured as the difference between the original cost in foreign currency translated at the current spot rate and the historical functional currency cost. Consistent with the presentation in FASB ASC 946-830-55-4, Illustration B shows the calculation of the market and currency components of unrealized gains and losses on an investment.
Day 1: 1,000 shares of XYZ subsequently measured at fair value @ £16.00; spot rate: $1.85 = £1.00. |
|||||
Market gain/loss | = | (FC current fair value – FC cost) × current FX rate | |||
Currency gain/loss | = | FC cost × (current FX rate – FX rate on day of purchase) | |||
Market gain | = | (£16,000 – £15,000) × 1.85 | = | $1,850 |
|
Currency gain | = | £15,000 × (1.85 – 1.75) | = | $1,500 |
|
Total gain in functional currency | $ 3,350 |
||||
Total gain – (£16,000 × 1.85) – (£15,000 × 1.75) = $29,600 – $26,250 = $3,350 |
Journal Entries — Subsequent Measurement at Fair Value | ||||
[Average rates may be used if fluctuations in exchange rates aren’t significant] | ||||
Day 2: 1,000 shares of XYZ marked to market @ £17.00; exchange rate: $1.80 = £1.00. |
||||
Market gain | = | (£17,000 – £15,000) × 1.80 | = | $3,600 |
Currency gain | = | £15,000 × (1.80 – 1.75) | = | $ 750 |
Total functional currency gain | $4,350 |
|||
Daily Journal Entries | ||||
Market gain/loss | = | $3,600 – $1,850 | = | $1,750 |
Currency gain/loss | = | $750 – $1,500 | = | ($750) |
Day 2 gain ($4,350 – $3,350) | = | $1,000 |
C. Other Assets/Liabilities — FX Subsequent Measurement at Fair Value
As discussed in FASB ASC 946-830-45-23 all receivables and payables that are denominated in a foreign currency and that may relate to income or expense, or to securities sold or purchased, should be recorded on the trade date at the spot rate and should be translated into the functional currency each valuation date at the spot rate on that date. The difference between that amount and the functional currency amount that was recorded at the trade date spot rate for receivables for securities sold (or payables for securities purchased) is unrealized foreign currency gain or loss. Consistent with the presentation in FASB ASC 946-830-55-5, Illustration C shows the subsequent remeasurement of a receivable for securities sold between trade date and settlement date.
Sale of 1,000 shares of XYZ @ £ 12.00 = £12,000 receivable @ exchange rate $1.50 = £1.00 = $18,000 | ||||
Day 1: Spot rate moves to $1.55 = £1.00. |
||||
Currency gain | = | £12,000 × (1.55 – 1.50) | = | $600 |
Day 2: Spot rate moves to $1.58 = £1.00. |
||||
Currency gain | = | £12,000 × (1.58 – 1.50) | = | $960 |
Currency gain | Day 1 | Day 2 |
||
Daily Journal Entry | $600 | $360 |
D. Changes Between Trade and Settlement Dates1
As stated in paragraphs 21 and 23 of FASB ASC 946-830-45, all receivables and payables that are denominated in a foreign currency and that may relate to income or expense, or to securities sold or purchased, should be recorded on the trade date at the spot rate. On the settlement date, the difference between the recorded receivable (or payable) amount and the actual foreign currency received (or paid) converted into the functional currency at the spot rate should be recognized as a realized foreign currency gain or loss. Consistent with the presentation in paragraphs 6 and 8 of FASB ASC 946-830-55, Illustrations D and F show the calculation of realized gain or loss related to the change in a foreign currency denominated payable for securities purchased and receivable for securities sold, respectively, from the trade date to the settlement date.
Trade Date | ||
Purchase 1,000 shares of XYZ @ £15.00; exchange rate: $1.75 = £1.00. | ||
Cost basis: | $26,250 or |
£15,000 |
DR: sterling securities at cost | $26,250 |
|
CR: payables for securities purchased | $26,250 |
|
Settlement Date | ||
Exchange rate: $1.80 = £1.00; £15,000 is purchased at the spot rate for $27,000. | ||
DR: payables for securities purchased | $26,250 |
|
DR realized currency gain/loss | $750 |
|
CR: cash | $27,000 |
E. Settlement Against Foreign Currency Cash Balances
As discussed in FASB ASC 946-830-45-8 the disbursement of a foreign currency should result in a realized foreign currency gain or loss that is the difference between the functional currency equivalent of the foreign currency when it was acquired and the foreign currency disbursement translated at the spot rate on the disbursement date. Consistent with the presentation in FASB ASC 946-830-55-7, Illustration E shows the calculation of realized foreign currency gains and losses in the settlement against foreign currency cash balances.
£20,000 balance is available in London. | ||||
Lot a: | £10,000 purchased @ $1.65 per £1.00 | |||
$US cost basis: $16,500 | ||||
Lot b: | £10,000 purchased @ $1.85 per £1.00 | |||
$US cost basis: $18,500 | ||||
Assume lot b will be liquidated first at $1.80 per £1.00. | ||||
Lot b: | ||||
DR: cash | $18,000 |
|||
DR: realized currency gain/loss | $ 500 |
|||
CR: sterling cash at cost | $18,500 |
|||
Assume one half of lot a will be liquidated at $1.80 per £1.00. | ||||
Lot a: | ||||
DR: cash | $9,000 |
|||
CR: sterling cash at cost | $8,250 |
|||
CR: realized currency gain/loss | $750 |
|||
Realized FX gain on payable remains the same. | ||||
Between Purchase Settlement and Sale Trade Dates | ||||
Subsequently measure the holding at fair value, based on both local market price and daily spot rate. |
F. Sale of XYZ — Trade Date
Consistent with the presentation in FASB ASC 946-830-55-8, Illustration F shows the calculation of realized gain/loss related to the change in a foreign currency denominated receivable for securities sold from the trade date to the settlement date.
Sell 1,000 shares of XYZ @ £18.00; exchange rate: | $1.90 |
= | £1.00 |
Total proceeds: $34,200 or £18,000 | |||
FX gain is recognized on the sale trade date based on the holding period. | |||
Receivable is booked at the spot rate on sale trade date. | |||
DR: receivable for securities sold | $34,200 |
||
CR: sterling securities at cost (£15,000 × £1.75) | = | $26,250 |
|
CR: realized market gain/loss (£18,000 – £15,000) × 1.90 | = | $5,7002 |
|
CR: realized currency gain/loss (15,000 × 1.90) – 26,250 | = | $2,2503 |
|
Maintain local currency basis (£18,000) on the receivable record. | |||
Between Sale Trade Date and Settlement Date | |||
Subsequently measure the receivable at fair value based on the prevailing spot rate. | |||
Sale Settlement Date | |||
Spot rate: $1.85 = £1.00 | |||
£18,000 is converted at the spot rate to $33,300. | |||
FX loss is recognized upon the receipt (settlement) of the receivable. | |||
DR: cash | $33,300 |
||
DR: realized currency gain/loss4 | $ 900 |
||
CR: receivables from securities sold | $34,200 |
||
If foreign currency cash received is to be kept as local currency: | |||
Purchase: | £18,000 @ $1.85 = £1.00 |
||
Cost basis: | $33,300 |
||
DR: sterling cash at cost | $33,300 |
||
CR: cash | $33,300 |
__________________________