## Recognition and Subsequent Measurement of Foreign Currency Transactions
A foreign currency transaction is one that is denominated in, or requires settlement in, a foreign currency.
Examples:
- Purchase or sale of goods/services in foreign currency
- Borrowing or lending in foreign currency
- Purchase or sale of PPE denominated in foreign currency
---
### Step 1 – Initial Recognition
Record the transaction at the exchange rate on the date of the transaction.
---
### Step 2 – Subsequent Measurement at Balance Sheet Date
| Item Type | Carried at | Remeasure at Closing Rate? |
|---|---|---|
| Monetary items (payables, receivables, loans) | Closing rate | ✓ Yes |
| Non-monetary at historical cost (PPE-cost model, Inventory-cost) | Rate on transaction date | ✗ No |
| Non-monetary at fair value / NRV (PPE-revaluation, Inventory-NRV) | Rate when fair value was determined | ✓ Yes |
---
### Step 3 – Exchange Differences → Profit & Loss
All exchange differences arising on monetary items are transferred to the Profit & Loss Account.
#### Quick Shortcut to identify Gain vs Loss:
| Item | Rate Increases | Rate Decreases |
|---|---|---|
| Liability (payable, loan) | Loss (will pay more ₹) | Gain (will pay less ₹) |
| Asset (receivable) | Gain (will receive more ₹) | Loss (will receive less ₹) |
---
### Journal Entry Pattern
On transaction date:
```
Dr Asset / PPE / Purchases A/c [FC × transaction rate]
Cr Creditors / Loan A/c [FC × transaction rate]
```
At year-end (monetary items only):
```
If Exchange Loss:
Dr Exchange Loss A/c (P&L)
Cr Creditors / Loan A/c
If Exchange Gain:
Dr Creditors / Loan A/c
Cr Exchange Gain A/c (P&L)
```
On settlement:
```
Dr Creditors / Loan A/c [Book value at last remeasurement]
Dr/Cr Exchange Loss/Gain A/c [Balancing figure]
Cr Bank A/c [FC × settlement rate]
```