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foreign currency transaction

A foreing currency transaction is a sales or purchase transaction denominated in a currency other than the company’s functional currency. A foreign currency transaction involving foreign currencies commonly goes through several stages.

(a) Forecast. A forecast is an anticipated transaction that is not yet legally committed. In IFRS terms, a transaction is ‘expected to occur’ if its estimated probability ranges between 20% and 75%.

(b) SO/PO. Also known as a ‘firm commitment’, a SO/PO (sales order/purchase order) is a legally binding agreement that establishes the exchange of a specified quantity of resources at a specified price on a specified future date or dates.

(c) AR/AP. A foreign currency denominated trade receivable or payable is a legally enforceable claim that certifies the sale/purchase to be settled at a later date.

(d) Settlement. The transaction is settled when payment in cash, in a foreign currency, finally takes place.