Gains and Losses Resulting from Exchange Rate Changes

An enterprise that conducts business in more than one currency can have financial gains or losses due to changes in currency exchange rates. You can set up DPS to calculate and post currency exchange gains and losses in accordance with the generally accepted accounting practices that apply to your company.

Gains and losses commonly result from the following:

• Transactions conducted in a currency other than the principal company’s functional currency.
• Revaluation of general ledger account balances denominated in a currency other than the company’s functional currency.

If you track multiple currencies, DPS automatically posts realized gains and losses from foreign currency transactions when you settle the transactions. You calculate and post other currency exchange gains and losses using the Gains/Losses and Revaluations process in Accounting.

Currency Exchange Gain or Loss

• A currency exchange gain occurs when the settlement of a transaction or the revaluation of an account balance results in an expected or actual increase in cash flow into your company.
• A currency exchange loss occurs when the settlement of a transaction or the revaluation of an account balance results in an expected or actual decrease in cash flow into your company.

These gains and losses can be either realized or unrealized.

Unrealized Gains and Losses

• An unrealized currency exchange gain is an expected increase in cash resulting from a change in currency exchange rates.
• An unrealized currency exchange loss is an expected decrease in cash resulting from a change in currency exchange rates.

For example, assume that your company’s functional currency is United States dollars. You bill a client in euros when the exchange rate is 1.5 dollars to the euro. At the end of the accounting period, you have not yet received payment. The exchange rate is now 1.6 dollars to the euro. When you revalue the unpaid balance based on the new exchange rate, the result is an unrealized gain. The change in the exchange rate results in a potential increase in cash for your company, but you have not yet actually received that cash.

Realized Gains and Losses

• A realized currency exchange gain is an actual increase in cash resulting from a change in currency exchange rates.
• A realized currency exchange loss is an actual decrease in cash resulting from a change in currency exchange rates.

For example, assume that your company’s functional currency is United States dollars. You bill a client in euros when the exchange rate is 1.5 United States dollars to the euro. When you post the cash receipt, the exchange rate is 1.6 dollars to the euro. The result is a realized gain. The change in the exchange rate results in an actual increase in cash for your company.

Generally Accepted Accounting Practices and Currency Gains and Losses

Compliance with generally accepted accounting practices in the United States requires that you include realized currency exchange gains and losses in net income. For unrealized gains and losses, you can either include them in, or exclude them from, net income.

Businesses located outside of the United States sometimes operate under different standards. They may have different guidelines for determining realized and unrealized gains and losses and for including such gains and losses in net income. For example, some generally accepted accounting practices outside of the United States do not allow you to post unrealized gains or losses to Income Statement accounts.

DPS provides the flexibility to handle currency exchange gains and losses in accordance with whatever generally accepted accounting practices your company operates under.