CFM8005 - Accounting for foreign exchange: SSAP20 basic principles

Translating transactions

The basic principles for translating foreign currency items in an individual company’s accounts are set out in SSAP20.

Transactions

A transaction, such as a sale or a purchase, is translated at the rate of exchange in operation at the date of the transaction. (But this doesn’t apply where the company is contracted to settle the transaction at some different exchange rate – see CFM8008).

Example

Selvakan Ltd, a manufacturing company which draws up accounts to 31 December, purchased raw materials from a French supplier for €1,000. It recorded the transaction on 1 June 2004, the date of the supplier’s invoice. On that date, the exchange rate was £0.59/€. It therefore recorded the purchase price as £590.

On 28 June 2004 the company sent a draft for €1,000 to the supplier. The exchange rate on that date was £0.61/€. Thus the company records a payment of £610 – it has made an exchange loss of £20.

As an approximation to translating transactions at the spot rate for each day, the company can use an average rate of exchange provided that the currency in question does not fluctuate significantly. For example, a shop selling tourist souvenirs, which accepts large numbers of cash payments in dollars and euros, might translate foreign currency sales at an average exchange rate for the week, or the month. However, it wouldn’t be appropriate for a company which has a small number of high value foreign currency transactions to use an average exchange rate. This would not give a reasonable approximation to using the spot rate for the day of each individual transaction.