CFM26040 - Accounting for corporate finance: foreign exchange: basic principles: balance sheet
Balance sheet: 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 20X4, Selvakan Ltd sold goods to a French customer for 鈧�5,000. The exchange rate on that date was 拢0.62/鈧�, so the company records the sale at 拢3,100. At the accounting date, 31 December 20X4, the debt has not yet been paid. The exchange rate on 31 December is 拢0.65/鈧�. The company translates the trade debt at the closing rate, so it appears in the balance sheet as 拢3,250. The company will report an exchange profit of 拢150.
In 20X3, Selvakan Ltd borrowed 鈧�200,000 from a bank for five years. In the company鈥檚 accounts to 31 December 20X3, the loan was translated at the closing rate of 拢0.60/鈧�, i.e. to 拢120,000. In its 20X4 accounts, Selvakan Ltd must re-translate the loan to the 31 December 20X4 rate, so it appears on the balance sheet at 拢130,000. The company reports an exchange loss of 拢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 20X4, when the exchange rate is 拢0.58/鈧�, Selvakan Ltd buys a lease on an office in France for 鈧�500,000. It records the asset at 拢290,000. The cost of the lease is shown in the company鈥檚 balance sheet at 31 December 20X4, and subsequent balance sheets, as 拢290,000. Amortisation of the lease charged in the accounts is also based on 拢290,000.
Exception - fair value accounting
An exception to the basic principle is provided by FRS 23 under Old UK GAAP, IFRS and New UK GAAP where a non-monetary item is included in the accounts at fair value. In that instance the exchange rate at the date when the fair value was determined is used.