# Revaluations and exchange rate differences

Documentation •

Exchange rates vary all the time and therefore the exchange value to basic currency also varies. Between one period and another, there will inevitably be exchange rate differences.

Exchange rate differences are not accounting errors but simple adjustments of the values made necessary in order to keep the accounting figures in line with fluctuations.

As you open the accounting, the figures in the balance column are equal to those present in the opening column. When there are entries, these will update the figures in the balance column.

The calculated balance column contains the exchange value of the basic currency for the account balance, at the daily exchange rate (of the exchange rate table). The difference between the balance in basic currency and the calculated balance is the exchange rate difference.

 Currency at opening Exchange value at opening in EUR Basic currency balance in EUR Calculate balance at 30.03.200xx in EUR Exchange rate difference Exchange rate 1.32030 1.32030 1.30150 Cash EUR 93.80 93.80 93.80 93.80 Bank USD 100.00 75.74 75.74 76.83 1.09 Real estate EUR 1'000.00 1'000.00 1'000.00 1'000.00 Total Assets 1'169.54 1'169.54 1'170.63 Loan USD -500.00 -378.70 -378.70 -384.17 -5.47 Personal capital EUR -790.84 790.84 -790.84 -790.84 Total Liabilities -1'169.54 -1'169.54 -1'175.01 Loss -4.38

On March 30th the EUR/USD exchange rate is different from the one at the beginning of the year. In the above example, there were no accounting entries during the three-month period. The situation, from an accounting point of view, has not changed since the beginning of the year. Despite this the total of the updated balance, using the rate at the end of March, is different when compared to the beginning of the year. The credit bank balance and the loan in USD have a different value in EUR. There are therefore consequences for the accounting even though there have been no entries.

In the above example, you will notice that the Euro is now worth less against the dollar compared to the beginning of the year. The dollar is therefore worth more against the Euro.

The exchange value of the balance on the account in USD is greater than it was at the beginning of the year. You have a greater value of the asset and therefore a profit on the exchange rate.

On the liability side there is a USD 500.00 loan. Now the exchange value in EUR is greater compared to the value input at the beginning of the year. The value of the loan has increased and brings about a loss due to the exchange rate difference.

In the following example we shall use the hypothesis that there has been the opposite development. We imagine that the Euro has increased in value and is therefore worth more against the USD. The exchange value in EUR of an amount in dollars is less than the one at the beginning of the year.

 Currency at opening Exchange value at opening EUR Calculate balance at 30.03.20XX Eur (Hypothetical) Exchange rate difference Exchange rate 1.32030 1.36150 Cash EUR 93.80 93.80 93.80 Bank USD 100.00 75.74 73.44 -2.30 Real estate EUR 1'000.00 1'000.00 1'000.00 Total Assets 1’169.54 1'167.24 Loan USD -500.00 -378.70 -367.24 11.46 Personal capital EUR -790.84 -790.84 -790.84 Total Liabilities -1’169.54 -1'158.08 Profit 9.16 9.16

As a consequence of an increase in the Euro/dollar exchange rate, you have a USD bank deposit with an exchange value in EUR which is less than at the beginning of the year. The total worth has diminished and there is therefore a loss.

The USD loan has a lower exchange value in EUR. A lesser liability is an advantage for the company and there is thus an exchange rate profit.

Exchange rate profit

You have an exchange rate profit when:

• The exchange value of your assets increases (increase of the investments)
• The exchange value of the liabilities decreases (decrease of the loans).

Exchange rate losses

You have an exchange rate loss when:

• The exchange value of your assets decreases (decrease of the investments)
• The exchange value of the liabilities increases (increase of the loans).

## Accounting features for exchange rate differences

Exchange rates can evolve in different ways. Often they rise, only to fall again. The principle rule for accounting is that the figures provided on the Balance Sheet must be true ones. When you present your Balance Sheet, the exchange values of foreign currency accounts must be made at the exchange rate on the day of presentation.

The exchange rate difference is calculated as if you had to definitively convert the amount to basic currency. In reality there is no definitive conversion so you are only dealing with a correction to the accounting.

Closing exchange rate

At the end of each year it is necessary to prepare the complete Balance Sheet. The exchange rates thus have to be updated with the closing exchange rates. It is also necessary to enter the exchange rate differences once and for all; if these are not entered, then there will be differences in the opening balances.

Entering exchange rate differences

 Currency balance Account balance EUR Calculate balance at 30.03.xx EUR (hypothetical) Exchange rate difference Exchange 1.32030 1.36150 Bank USD 100.00 75.74 73.44 -2.30 Exchange rate difference EUR -2.30 Bank USD 100.00 73.44 73.44 0.00

As can be seen from the above example, the bank balance is USD 100.00. For the accounting it has been valued at 75.74 EUR. Today’s actual value, though, is only EUR 73.44. There is a difference of EUR 2.30 EUR in basic currency. The entry must therefore decrease the EUR amount. You proceed with a transaction that debits the bank account and credits the exchange rate loss account by EUR 2.30.

As you can see, the actual bank account balance of USD 100.00 has not been altered. The entry only alters the basic currency balance.

When entering the exchange rate difference, you need to ascertain that the exchange value in basic currency corresponds to the actual exchange value, calculated at either the daily exchange rate or the closing one.

The figures in the account currency must not be altered. You must therefore proceed to make an entry that only alters the basic currency balance on the specific account.

You will have the exchange rate profit or loss account on the contra account.