What is Foreign Currency Transaction?
A foreign currency transaction is a transaction that is denominated in or requires settlement in a currency other than the entity’s functional currency. Under IAS 21, it is initially recorded at the spot exchange rate on the transaction date and remeasured at each reporting date for monetary items.
How It Works
- Translate the initial transaction at the spot rate on the date of the transaction.
- Translate monetary items (receivables, payables, cash) at the closing rate on each reporting date.
- Recognize foreign exchange gains and losses in profit or loss.
- Leave non-monetary items at historical rate (unless measured at fair value).
Saudi Context
Saudi businesses importing from Europe or Asia routinely record foreign currency transactions and remeasure outstanding balances at month-end using SAMA reference rates.
Example
A Saudi company buys EUR 100,000 of inventory when the rate is 4.00, recording inventory at SAR 400,000 and a SAR 400,000 payable. If the rate moves to 4.05 at month-end and the payable is unsettled, the company records a SAR 5,000 FX loss.