Loan

Loans have no affect on profit and loss so this question makes no sense. They are balance sheet items.

For a foreign currency loan you would set up a bank account in that currency.

To set up the loan you makie a journal entry where you:
a) DR the bank account receiving the cash.
b) CR a 'Loan' liabilities account.

As you pay off the loan, you make more journal entries: CR the bank account as the balance decreases and DR the liability loan account to decrease it.

You have made a profit on forex, so you need to enter a balance day adjustment using a normal journal transaction :

CR a P&L account called something like 'Profit/Loss on Forex' or 'Profit and Loss on Forex Loan USD-EUR' if you need to be more specific.

DR an Asset account usually called something 'Retained profits on Forex' or 'Retained profits on forex loans' ('Retained' is the usual name for profit/losses brought to balance sheet in Australia, I think it's the same in Europe too. You may want to check a public company annual report for the right terminology).

You don't need to touch your original loan account: it's in USD so is unchanged in value in this currency.

This is the standard way of handling P&L on Forex changes - make balance day adjustments for all your revaluations (you may even need to to do this for things like debtors  and A/P, not sure about your jurisdiction).

Hope that helps.

I think you need to talk to an account. You cannot have foreign currency accounts in your GL (General Ledger). You should setup your foreign currency accounts as bank accounts. Then use the Bank payment/deposit (MISC) to enter your interest etc for this bank account. This will create correct GL postings in the background.

/Joe

IAS 21 says record the liability in your home ('functional') currency at the start date, then make P&L adjustments based on gain/loss. The original liability account should be untouched. FA handles it this way.

"IAS 21, The Effect of Changes in Foreign Exchange Rates requires recognition of foreign exchange differences as income or expense in the period in which they arise"

Given this, AP and AR are unchanged. Changes are reflected only in the P&L on forex.

Restating the original loan after a currency change is not done according to IAS 21 ie. your option b) is not appropriate if I've worked out the question you're trying to ask.

hi joe and p2409,

below I am copying an interpretation of IAS 21 about "Translation of Foreign Currency Transactions"

According to IAS 21, a foreign currency transaction is a transaction that is "denominated in or requires settlement in a foreign currency." Denominated means that the amount to be received or paid is fixed in terms of the number of units of a particular foreign currency, regardless of changes in the exchange rate.

From the viewpoint of a US company, for instance, a foreign currency transaction results when it imports or exports goods or services to a foreign entity or makes a loan involving a foreign entity and agrees to settle the transaction in currency other than the US dollar (the reporting currency of the US company). In these situations, the US company has "crossed currencies" and directly assumes the risk of fluctuating exchange rates of the foreign currency in which the transaction is denominated. This risk may lead to recognition of foreign exchange differences in the income statement of the US company. Note that exchange differences can result only when the foreign currency transactions are denominated in a foreign currency.

When a US company imports or exports goods or services and the transaction is to be settled in US dollars, the US company will incur neither gain nor loss because it bears no risk due to exchange rate fluctuations. The following example illustrates the terminology and procedures applicable to the translation of foreign currency transactions.

Assume that a US company, an exporter, sells merchandise to a customer in Germany on December 1, 2002, for 10,000 DM. Receipt is due on January 31, 2003, and the US company prepares financial statements on December 31, 2002. At the transaction date (December 1, 2002), the spot rate for immediate exchange of foreign currencies indicates that 1 DM is equivalent to $0.50.

To find the US dollar equivalent of this transaction, the foreign currency amount, 10,000 DM, is multiplied by $0.50 to get $5,000. At December 1, 2002, the foreign currency transaction should be recorded by the US company in the following manner: Accounts receivable—Germany 5,000; sales 5,000. The accounts receivable and sales are measured in US dollars at the transaction date using the spot rate at the time of the transaction. While the accounts receivable is measured and reported in US dollars, the receivable is denominated or fixed in DM.

This characteristic may result in foreign exchange differences if the spot rate for DM changes between the transaction date and the date of settlement (January 31, 2003). If financial statements are prepared between the transaction date and the settlement date, all receivables and liabilities that are denominated in a foreign currency (the US dollar) must be restated to reflect the spot rates in existence at the balance sheet date.

Assume that on December 31, 2002, the spot rate for DM is 1 DM = $0.52. This means that the 10,000 DM are now worth $5,200 and that the accounts receivable denominated in DM should be increased by $200. The following journal entry would be recorded as of December 31, 2002:

Accounts receivable—Germany 200
   
Foreign currency exchange difference   200

Note that the sales account, which was credited on the transaction date for $5,000, is not affected by changes in the spot rate. This treatment exemplifies the two-transaction viewpoint (which is a US GAAP expression). In other words, making the sale is the result of an operating decision, while bearing the risk of fluctuating spot rates is the result of a financing decision. Therefore, the amount determined as sales revenue at the transaction date should not be altered because of a financing decision to wait until January 31, 2003, for payment of the account.

The risk of a foreign exchange transaction loss can be avoided either by demanding immediate payment on December 1 or by entering into a forward exchange contract to hedge the exposed asset (accounts receivable). The fact that the US company in the example did not act in either of these two ways is reflected by requiring the recognition of foreign currency exchange differences (transaction gains or losses) in its income statement (reported as financial or non operating items) in the period during which the exchange rates changed.

This treatment has been criticized, however, because both the unrealized gain and/or loss are recognized in the financial statements, a practice that is at variance with traditional GAAP. Furthermore, earnings will fluctuate because of changes in exchange rates and not because of changes in the economic activities of the enterprise.

On the settlement date (January 31, 2003), assume that the spot rate is 1 DM = $0.51. The receipt of 10,000 DM and their conversion into US dollars would be journalized in the following manner:

Foreign currency 5,100
   
Foreign currency transaction loss 100
   
Accounts receivable—Germany   5,200

Cash 5,100
   
Foreign currency   5,100

The net effect of this foreign currency transaction was to receive $5,100 from a sale that was measured originally at $5,000. This realized net foreign currency transaction gain of $100 is reported on two income statements: a $200 gain in 2002 and a $100 loss in 2003. The reporting of the gain in two income statements causes a temporary difference between pretax accounting and taxable income. This results because the transaction gain of $100 is not taxable until 2003, the year the transaction was completed or settled. Accordingly, inter-period tax allocation is required for foreign currency transaction gains or losses.

joe and p2409,
about the loan I have resolved the case based on the above explanation (doing the revaluation in FA, but now I am thinking about the AP and AR)

many thanks eglis

We are running a similar discussion here.

https://frontaccounting.com/punbb/viewtopic.php?id=2076

Can vi continue the discussion there. I will try to explain how it can be solved.

/Joe