Foreign exchange gain

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Indigo (Querist)
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04 July 2011 company imports goods from france. make payment in euro. must pay in advance and goods ll be shipped in 45 days. how to account foreign exchange gain/loss on purchase/advance money paid for goods.

advance payment is maintained in books at creditor with local currency shud i make foreign currency exchang fluc gain/loss calc on the year end creditor with debit balance?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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05 July 2011 At the time of contract there is some value and at that rate you book the purchase.

If you are to pay more at the time of taking delivery of goods then it is loss on exchange fluctuation

In the reverse situation it is the Reverse and it is gain on exchange fluctuation.

RAMESH KUMAR VERMA

RAMESH KUMAR VERMA (Expert)
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05 July 2011 thanks expert ji.

dear author,

The Supreme Court held the loss claimed by a company on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is allowable as expenditure under Section 37 of the Income Tax Act.
The court stated so in the appeal case, ONGC vs Commissioner, where the argument of ONGC was accepted and the view of the authorities was rejected.

The judgement also held that ONGC was entitled to adjust the actual cost of imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance sheet dates pending actual payment of the varied liability.

Indigo

Indigo (Querist)
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07 July 2011 thx experts.

so if there is no difference in prices we need not books exchange gain or loss. is that right?

we place the order, pay money as advance. aft 40 days we receive product that we record purchase in books with the price we paid. in this case there is no price rise but exchange rates on date of payment and date on which goods rcvd/booked there is difference in rate. need clarity on how to treat the same? will there be foreign exchange fluctuation applicable?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2024 In the scenario described, where a company imports goods from France and makes advance payment in Euros, the treatment of foreign exchange gain or loss depends on the timing and exchange rate differences between the payment date and the receipt/booking of goods. Here’s how you can approach the accounting for foreign exchange fluctuations:

### Scenario 1: No Price Change, Exchange Rate Difference

1. **Advance Payment Recording:**
- Record the advance payment made in Euros as a liability (creditor) in your books, maintaining the amount in Euros.

2. **Year-end Reporting (if applicable):**
- At the year-end or reporting date, convert the liability amount (advance payment in Euros) to your local currency using the exchange rate prevailing at that date.
- Compare this converted amount with the original advance payment recorded in local currency. Any difference due to exchange rate fluctuations will result in a foreign exchange gain or loss.

3. **Calculation of Foreign Exchange Gain/Loss:**
- Calculate the foreign exchange gain or loss by comparing the original advance payment amount in local currency with the converted amount using the year-end exchange rate.
- If the exchange rate has strengthened (local currency strengthened against Euro), there will be a foreign exchange gain. If the exchange rate has weakened, there will be a foreign exchange loss.

### Scenario 2: Price Change and Exchange Rate Difference

1. **Advance Payment Recording:**
- Similar to Scenario 1, record the advance payment made in Euros as a liability (creditor) in your books.

2. **Goods Receipt and Booking:**
- When you receive the goods after 40 days, record the purchase of goods in your books at the actual price paid in Euros.
- Convert the Euro amount paid for goods into your local currency using the exchange rate on the date of receipt or booking of goods.

3. **Calculation of Foreign Exchange Gain/Loss:**
- Calculate the foreign exchange gain or loss on the advance payment for goods similarly as in Scenario 1, comparing the advance payment recorded in local currency with the converted amount using the exchange rate at the receipt/booking date.
- Additionally, calculate the foreign exchange gain or loss on the purchase of goods by comparing the Euro amount paid for goods with the converted amount in local currency using the exchange rate at the receipt/booking date.

### Treatment in Books:
- **Creditor (Advance Payment):** Maintain the liability in Euros until it is settled or adjusted against the actual payment for goods received.
- **Foreign Exchange Gain/Loss:** Recognize foreign exchange gain or loss in your income statement or profit and loss account for the period in which the exchange rate fluctuation occurs.
- **Reporting:** Ensure compliance with accounting standards (e.g., Indian Accounting Standards, if applicable) regarding the treatment and disclosure of foreign exchange gains or losses.

### Note:
- It's essential to use consistent exchange rate sources and methods for conversions to maintain accuracy and reliability in financial reporting.
- Consider consulting with a qualified accountant or financial advisor, especially if your company operates in multiple jurisdictions or deals with significant foreign currency transactions regularly.

By following these guidelines, you can appropriately account for foreign exchange fluctuations related to advance payments for imported goods, ensuring compliance and accurate financial reporting.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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