BIM39510 - Foreign exchange: exchange rate for accounts purposes

Foreign exchange transactions should be accounted for in accordance with FRS 102 Section 30 Foreign Currency Translation.

Related standards under other frameworks are:

FRS 105 Section 25 Foreign Currency Translation

IAS: IAS 21 The Effects of Changes in Foreign Exchange Rates

Old UK GAAP: SSAP 20 Foreign Currency Translation; FRS 23 The Effects of Changes in Foreign Exchange Rates

FRS 102 Section 30 generally requires a business to recognise foreign currency transactions (such as sales or purchases of goods or fixed assets) in its accounts:

  • At the date of initial recognition, i.e. the date the transaction first qualifies for recognition,

  • Using the spot exchange rate between the entity’s functional currency and the foreign currency at that date.

  • The business can use an average exchange rate provided that exchange rates do not fluctuate significantly in the relevant period. For example, a business that makes a large number of purchases in euros each month might use the average euro/sterling exchange rate for the month to translate all the purchases.
  • If the business has hedged the transaction with a forward currency contract or a currency swap, the rate of exchange specified in the currency contract may be used to translate the transaction. There is more about currency contracts at BIM39570.

At the end of the period of account, the business is required to retranslate monetary items (money held, and amounts to be received or paid in money) into sterling at the closing rate. ‘Closing rate’ means, broadly, the exchange rate in force on the last day of the period of account.

At the end of the period of account, non-monetary items measured at cost should be translated using the exchange rate at the date of the transaction. Non-monetary items measured at fair value in a foreign currency should be measured using the exchange rates at the date when the fair value was determined.

Any differences arising from the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous periods should generally be recognised in profit or loss (or other comprehensive income, where this is in accordance with guidance elsewhere in FRS 102).

Further information on accounting for foreign exchange, including comparison between accounting frameworks, is set out in the Corporate Finance Manual section CFM26000.