Foreign currency revaluation overview

Revaluation provides a way to recognize an unrealized gain or loss due to fluctuating exchange rates in multi-currency transactions. The gist of the process is that you identify transaction gains or losses and then make journal entries to compensate for them.

About foreign currency revaluation

Say you are a company based in the US that also does business in Canada. You buy goods from suppliers in Canada, and resell those goods to customers there. You have on-going AP and AR transactions with those suppliers and customers in Canadian dollars. Additionally, you have a Canadian bank account so that you can make payments to suppliers and deposit receipts from customers. That bank account has a balance in Canadian dollars.

Your reporting period is monthly. At the end of the last reporting period, you published financials that included pending Canadian transactions as well as the base-currency value of your Canadian bank account balance. In your financials, the system converts those pending foreign-currency transactions into base currency at the appropriate exchange rate.

During the next month, the value of Canadian currency fluctuates relative to your base currency, US dollars. Meanwhile, some pending transactions remain unpaid at the end of the next month as well. The base-currency value of those transactions will be different at the end of that month. This causes an unrealized gain or loss.

For example, say you previously stated an AP transaction is valued at $100 US dollars, it might be now be valued at $96 due to currency fluctuation. Because you have to pay $4 less, you have an unrealized gain of $4 relative to what you previously stated.

Consequently, at the end of the reporting period, you revalue the outstanding foreign-currency transactions in both Accounts Payable and Accounts Receivable. More specifically, you make journal entries to offset those unrealized gains or losses. Following that, you make a reverse set of those journal entries so you can begin the following period anew. You also perform a similar process to foreign-currency bank accounts in Cash Management.

Revalue AP and AR transactions

The revaluation process is identical for both Accounts Payable and Accounts Receivable, although you do them separately. Because they are identical, the following example illustrates only AP.

The AP and AR Open Items Revaluation Reports assist you in this process (Accounts Payable or Accounts Receivable > All > Reports > AP/AR open items revaluation). These reports show unpaid foreign-currency transactions, and their value in base currency on a given date based on the exchange rate as of that date. The report also states the base-currency gain or loss. You use that data to make the journal entries to offset those gains or losses.

At the end of the first period

In the following example, say you have an unpaid AP transaction for 120 Canadian dollars, which was equivalent to 100 US dollars when the transaction occurred on January 5. At the end of the period, January 31, the transaction is still in the amount of 120 Canadian dollars, but the fluctuation in the exchange rate has increased the US dollar equivalent to 105 US dollars.

Jan. 5, 2025		Jan. 31, 2025
CAD	USD	CAD	USD
120.00	100.00	120.00	105.00

This results in an unrealized loss of 5.00 because you would now have to pay another 5.00 for the item. You need to offset this loss by making a corresponding journal entry.

The next illustration shows that journal entry. AP gained 5.00, which you offset by a 5.00 debit to your unrealized gain or loss account. Consequently, you have now stated the correct value of that transaction as of the end of the reporting period on 1/31.

Jan. 31, 2025	DR	CR
AP		5.00
Unrealized G/L	5.00

As mentioned previously, you find the data for these entries in the AP Open Items Revaluation Report. When you go to the report at the end of the reporting period, you see the fluctuation, and the gain or loss.

Supplier	Trans Curr	Trans Amt	Base Amt	Type	Reval Exch Rate	Reval Amt	Gain	Loss
WLRDWD	CAD	120.00	100.00	Intacct Daily Rate	0.87500			5.00

As you can see from the example illustration above, the transaction has an unrealized loss of 5.00. In the real world, the report contains multiple lines, one for each supplier with whom you have conducted multi-currency transactions. Although the report also gives you a net unrealized gain or loss, you probably want to revaluate each supplier in the list. If you have many lines in the report, one way to speed this process is to export the report, massage it into journal entries in Excel, and then upload the journal entries via a CSV upload. You find the Export button in the upper right corner of the report.

At the beginning of the next period

The journal entry you just posted is an unrealized loss. If it were not corrected, you would go into the next month's reporting period with this unrealized loss. However, the reality is that the currency valuation could fluctuate either way. In other words, that loss could turn into a gain. So, your accounting should not assume that this loss will continue into the next month. Consequently, at the beginning of the next month, which is February 1 in this example, you reverse the prior entry. More specifically, you enter an opposite journal entry as follows to set the numbers back to the original.

Feb. 1, 2025	DR	CR
AP	5.00
Unrealized G/L		5.00

At the end of the next period

Then another month goes by, and the transaction still has not been paid. You again have an unrealized gain or loss due to currency fluctuation. Say that on February 28, the currency valuation has swung the other way and you would need to pay only 96.00 US dollars on February 28 to the supplier for the transaction that occurred on January 5.

Jan. 5, 2025		Feb. 28, 2025
CAD	USD	CAD	USD
120.00	100.00	120.00	96.00

You now have a gain of 4.00 instead of the prior loss of 5.00. So, at the end of this period, you make the following journal entry.

Feb 28, 2025	DR	CR
AP	4.00
Unrealized G/L		4.00

This is again following by a reverse entry at the beginning of the subsequent period to reset the unrealized gain or loss back to zero so that you may accommodate the fluctuation for the next period.

Mar. 1, 2025	DR	CR
AP		4.00
Unrealized G/L	4.00

Transaction gain and loss

The prior section explains how to handle unrealized gains and losses for open transactions. This section explains how the system handles the realized gains and losses for completed transactions. The essence is that the system calculates the gain or loss that is realized when the transaction actually occurs, and then post the appropriate compensating entry.

For example, you receive an AP supplier invoice for 120 Canadian dollars. Say that you book that AP supplier invoice on January 5, when the USD > CAD exchange rate is 1.20, which means that the USD equivalent of $120 CAD is 100 US dollars. This is shown on the left side of the following diagram. However, when you actually pay the AP supplier invoice on January 24, the exchange rate has fluctuated to 1.25 such that only 96 US dollars is required to paid the AP supplier invoice. You therefore have a gain of $4 ($100 - $96 = $4).

Jan. 5, 2025		Jan. 24, 2025
CAD	USD	CAD	USD
120.00	100.00	120.00	96.00
Exchange rate		Exchange rate
USD > CAD = 1.20		USD > CAD = 1.25
CAD > USD = 0.83		CAD > USD = 0.80

The system handles this by making two entries. One is for the original base-currency amount of $100, and the other is a compensating entry for the $4 gain.

More specifically, to fulfill the payment requirements of the original AP supplier invoice, you need to pay $120 CAD which is $100 in base currency. However, during the payment process on January 24, the system sees that the exchange rate is 1.25. Therefore, only $96 US dollars is required to pay the AP supplier invoice of $120 Canadian dollars. You have gained $4.

When you make the cheque for the $120 CAD payment (Payment #1) in the following diagram, the system makes the conversion to USD using the current exchange rate, which is now 1.25. This results in an amount of $96 in base currency that is actually recorded as the payment. Simultaneously, the system creates a second internal-only payment record (Payment #2) of $4.

Payments			AP supplier invoices
	Trx Amt	Base Amt	Trx Amt	Base Amt
Cheque - Payment #1	120.00	96.00	120.00	100.00
PM - Payment #2	0.00	4.00
	120.00	100.00

You can see this second payment record in the AP Ledger or AR Ledger, and in the General Ledger. The system posts this payment to the GL Accounts for Multi-Currency Gain and Loss selected in the Configure Accounts Payable (Accounts Payable > Setup > Configuration) or Configure Accounts Receivable page (Accounts Payable > Setup > Configuration).

This payment record operates identically to the actual payment. If the actual payment to a supplier is for multiple AP supplier invoices that have multiple lines, the gain or loss payment record is also attributed to the same AP supplier invoices and line items. In other words, say the cheque is for three AP supplier invoices where each has four lines each. If you examine the journal entry, you see that the payment record also has twelve lines, where the gain or loss is broken down for each line.