How to Revalue Foreign Currency Balances at Year End

If your business buys, sells or borrows in a currency other than the one your books are kept in, your year-end numbers are not finished until you revalue those balances. Get it wrong and your profit, your payables and your bank covenants can all be off. The good news: the method is simple once you know which balances move and which stay put.

The rule in one paragraph

Under IFRS, a foreign currency transaction is first recorded at the spot rate on the date it happens. At each reporting date, IAS 21 says "foreign currency monetary items are translated using the closing rate", while non-monetary items carried at historical cost stay at the rate on the original transaction date. The resulting exchange differences on monetary items generally go to profit or loss.

Indian companies on the older Indian GAAP standards follow the same idea. AS 11 requires monetary items to be reported using the closing rate at each balance sheet date, with exchange differences generally recognised as income or expense in the period they arise. If your company reports under Ind AS, check the treatment under Ind AS 21 with your adviser.

Monetary or non-monetary: sort your balances first

Most year-end mistakes happen here. Monetary items are money held, plus assets and liabilities to be received or paid in a fixed or determinable amount of money. Non-monetary items are everything else.

Revalue at the closing rate (monetary):

• Foreign currency bank and cash balances
• Trade receivables and trade payables
• Loans given and borrowings, including related-party loans
• Accrued expenses and income that will be settled in cash

Leave at the historical rate (non-monetary):

• Advances paid to suppliers and received from customers for goods or services
• Inventory, property, plant and equipment, and intangible assets

Advances catch people out. IAS 21 treats advance payments and receipts as non-monetary, and IFRIC 22 sets the rate at the date you first recognised the advance. So an advance paid to a European supplier in March for goods should not be revalued in December.

A worked example

For example, a hypothetical Doha trading company keeps its books in Qatari riyals. In September it records a supplier invoice for EUR 200,000 at an illustrative rate of QAR 4.10 per euro, so the payable is booked at QAR 820,000. It is still unpaid at 31 December.

If the illustrative closing rate is QAR 4.25 per euro, the same payable is now worth QAR 850,000. The company books an exchange loss of QAR 30,000 and increases the payable by the same amount. When it pays in January, any further movement is a new gain or loss in the new year.

The same company also paid a EUR 50,000 advance for goods not yet delivered. That stays at the rate on the day it was paid. No revaluation.

What this means for your business

Qatar and the wider GCC. The Qatari riyal is pegged at QR3.64 per US dollar, a peg the Qatar Central Bank has described as highly credible. That keeps dollar balances fairly stable in riyal terms, which can make teams forget about revaluation altogether. But euro, sterling, rupee and other non-dollar balances still move, sometimes sharply, and must be restated. If you operate elsewhere in the GCC, apply the same discipline to every non-functional-currency balance.

India. The rupee is not pegged, so dollar receivables from export customers and dollar borrowings can swing your year-end profit noticeably. If you have foreign currency loans, check how your standard treats exchange differences on them before you post anything, because there can be specific options or exceptions. Check with your adviser.

Groups across the GCC and India. Intercompany balances in a foreign currency are monetary items too. Agree which entity carries the currency risk and make sure both sides use the same closing rate, or your group reconciliation will not clear.

Your year-end revaluation checklist

• List every foreign currency balance in your trial balance, by currency and by account.
• Tag each one as monetary or non-monetary. Pay special attention to advances and deposits.
• Pick one closing-rate source, for example your central bank's published rate or your main bank's rate, and use it consistently across all entities.
• Confirm the balances first. Reconcile foreign currency bank accounts and agree large supplier and customer balances before you revalue.
• Post the revaluation for monetary items only, through a clearly labelled exchange gain or loss account.
• Decide on reversal. Many teams reverse the entry on the first day of the new period so settlement differences are calculated cleanly. Be consistent.
• Explain the number. Show exchange gains and losses separately in your MIS so owners don't confuse them with trading performance.
• Check your covenants. A large exchange loss can push borrowings up or profit down near a bank covenant limit. Know this before the auditors do.

Clean, reconciled bank balances make revaluation far quicker. NexCFO's bank reconciliation and MIS reporting are designed to give your team that starting point each month, rather than only at year end.

Sort your balances, use one rate, and revalue only what is monetary. Your year-end numbers will thank you.