CFM8006 - Accounting for foreign exchange: translation of balance sheet assets and liabilities

Translating monetary and non-monetary items

Monetary assets and liabilities

Where monetary items, such as debtors, trade creditors or long-term loans, remain outstanding at the balance sheet date, they are translated at the closing rate.

Example

On 5 November 2004, Selvakan Ltd sold goods to a French customer for €5,000. The exchange rate on that date was £0.62/€, so the company records the sale at £3,100. At the accounting date, 31 December 2004, the debt has not yet been paid. The exchange rate on 31 December is £0.65/€. The company translates the trade debt at the closing rate, so it appears in the balance sheet as £3,250. The company will report an exchange profit of £150.

In 2003, Selvakan Ltd borrowed €200,000 from a bank for five years. In the company’s accounts to 31 December 2003, the loan was translated at the closing rate of £0.60/€, i.e. to £120,000. In its 2004 accounts, Selvakan Ltd must re-translate the loan to the 31 December 2004 rate, so it appears on the balance sheet at £130,000. The company reports an exchange loss of £10,000.

Non-monetary assets

Non-monetary assets are translated at the historical rate of exchange when they were acquired, and are not re-translated.

Example

On 1 April 2004, when the exchange rate is £0.58/€, Selvakan Ltd buys a lease on an office in France for €500,000. It records the asset at £290,000. The cost of the lease is shown in the company’s balance sheet at 31 December 2004, and subsequent balance sheets, as £290,000. Amortisation of the lease charged in the accounts is also based on £290,000.