Glossaire

Foreign currency monetary items are FX-denominated assets and liabilities representing a claim to receive, or an obligation to pay, a fixed amount of foreign currency units. Examples of foreign currency monetary items are FX-denominated cash positions, accounts payable and receivable, and long-term debt. By contrast, non-monetary foreign currency items include inventory, fixed assets and long-term investments. The distinction between foreign currency monetary and non-monetary items is relevant in terms of the different techniques used in FX translation methods. With the monetary/nonmonetary method, monetary items such as cash, accounts receivable and payable, are translated at the current exchange rate, while nonmonetary items (inventory, fixed assets) are translated at the historical exchange rate.

A foreign currency option is a financial derivative instrument that gives the buyer the right —but not the obligation — to buy (in a ‘call’ option), or to sell (in a ‘put’ option) the contracted currency at a set price or exchange rate (known as the ‘strike price’), on a predetermined expiration date. The seller of the option must fulfill the contract if the buyer so desires. Because the foreign currency option has value, the buyer must pay the seller a premium in exchange for the right to exercise the option. An ‘American’ call or put option can be exercised at any time up to the expiration date; a ‘European’ option can be exercised only at maturity. When hedging regular foreign currency inflows and outflows, forward contracts are more widely used than foreign currency options. However, foreign currency options can be an efficient tool when contingent business events are hedged.

Foreign currency remeasurement is a procedure that restates the value of payables, receivables, and cash balances posted in a foreign currency to the company currency at period end. The key day for foreign currency remeasurement is the last day of the period or fiscal year. Items are valued using the exchange rate valid on the key date and compared to the amounts that were originally posted.

Foreign currency revaluation is the accounting process by which a company re-expresses the value of its open foreign currency-denominated receivables and payables in its functional reporting currency, using the exchange rate prevailing at the end of each accounting period.

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Why it matters

For any business trading across borders, exchange rates rarely stay still between the moment a transaction is booked and the moment it is actually settled. That gap — sometimes days, sometimes months — creates a moving target on the balance sheet. Accounting standards (including IFRS and most local GAAP frameworks) require companies to keep an up-to-date picture of those open positions in their reporting currency. Foreign currency revaluation is the mechanism that makes this possible.

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Without it, a company's financial statements would carry receivables and payables at stale exchange rates, giving management and investors a distorted view of the firm's true financial position.

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How the process works

At the close of each accounting period, the finance team identifies all open monetary items denominated in a foreign currency — typically trade receivables, trade payables, intercompany loans, and bank balances. Each balance is then retranslated using the current spot exchange rate.

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The difference between the rate at which the transaction was originally recorded and the rate used for revaluation generates what is known as an unrealised FX gain or loss. This is "unrealised" precisely because the underlying transaction has not yet been settled — the cash has not changed hands. These unrealised amounts are posted to the profit and loss account (or, in some hedge accounting frameworks, to other comprehensive income).

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Once the transaction is actually settled — the invoice is paid, the loan repaid — the FX difference between the original booking rate and the settlement rate becomes a realised FX gain or loss, which is recorded on the income statement and the balance sheet accordingly.

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The management challenge

Foreign currency revaluation is, in the first instance, an accounting obligation. But for CFOs and treasurers, the numbers it produces carry a deeper strategic message: they are a direct measure of how much unhedged FX exposure is sitting on the books at any point in time.

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Large, recurring unrealised FX losses are often a signal that the company's hedging programme is not adequately covering the full trade cycle — from the moment a commercial commitment is made through to cash settlement. Businesses that hedge only at the payment stage, for example, may still be accumulating significant revaluation risk across their open order book.

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This is where the relationship between revaluation accounting and FX risk management becomes operational, not merely technical.

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Reducing revaluation volatility

One effective way to reduce the impact of foreign currency revaluation on reported earnings is to hedge FX exposures at the transaction level — as early as a firm sales or purchase commitment is confirmed — rather than waiting until a payment is due. This approach, sometimes referred to as micro-hedging, aligns the economic hedge with the accounting exposure, narrowing the gap between booked and settled rates.

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For businesses seeking to eliminate FX gains and losses from the P&L more systematically, Kantox's approach to reducing FX gains and losses covers the full workflow from exposure capture to automated hedge execution.

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Finance teams who also need to ensure their hedges qualify for hedge accounting treatment — and therefore route revaluation differences through other comprehensive income rather than the P&L — can explore how the Kantox Hedge Accounting Module supports audit-ready documentation and effectiveness testing.

Foreign currency risk or foreign exchange rate risk, also known as exchange rate risk, is the possibility that currency fluctuations can affect a firm’s expected future operating cash flows, i.e., its future revenues and costs. Exchange rate risk affects all companies with international operations. For companies desiring to take advantage of the growth opportunities from buying and selling in multiple currencies, effectively managing currency risk is an essential task. Foreign currency risk can be decomposed into: Pricing risk, between the moment a transaction is priced and settled Transaction risk, between the moment a transaction is agreed and settled Accounting risk, between the moment the invoice is created and settled The most effective tool to manage foreign currency risk is to deploy FX hedging programs —and combinations of hedging programs — that allow management to achieve the firm’s goals in a systematic way, meaning: (a) targets must be consistently accomplished over time; (b) the goals of the program must be clearly communicated across the enterprise in as much detail as possible.

Foreign currency risk management is the process that allows firms to protect themselves from currency risk. This allows them to take control of their own competitiveness by capturing the growth opportunities resulting from buying and selling in multiple currencies. With FX risk under control, managers can focus on growing the business. Foreign currency risk management relies on a variety of hedging programs and combination of programs. The details of each program vary according to the pricing dynamics, the weight of FX in the business, the location of competitors, and the situation in terms of forward points. Implemented by means of Currency Management Automation solutions, foreign currency risk management programs also take into account the company’s sources of information, IT systems, degree of cash flow visibility, and key decision makers (their risk tolerance, their familiarity with different risk management styles, etc.).

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.

Foreign currency translation is the restatement, in the currency in which a company presents its financial statements, of all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies. The process of foreign currency translation results in accounting FX gains and losses. There are three main foreign currency translation methods available. With the current/noncurrent method, all the foreign exchange denominated current assets and liabilities are translated at the current exchange rate, while non-current assets and liabilities are translated at the historical exchange rate. With the monetary/nonmonetary method, monetary items such as cash, accounts receivable and payable, are translated at the current exchange rate, while nonmonetary items (inventory, fixed assets) are translated at the historical exchange rate. Finally, with the current rate method, all balance sheet and income statement items are translated at the current exchange rate. No matter what foreign currency translation is used, the resulting FX gains and losses are paper only, and rarely affect cash flows.

Foreign currency valuation is a term used by vendors of Enterprise Currency Management vendors to record the impact of foreign currency changes into its FX-denominated assets, liabilities, revenues, expenses, gains and losses Once foreign currency valuation is complete, foreign currency translation is executed to prepare financial reports in the firm’s presentation currency.

Foreign exchange or ‘FX’ is a term used to describe the exchange or trading of one currency to another. The foreign exchange market has no central marketplace: spot and forward market transactions take place in an ‘Over-the-Counter’ market made up of dealers and large commercial and investment banks. Turnover in global foreign exchange (FX) markets reached $6.6 trillion per day in April 2019, according to data from the Bank for International Settlements (BIS). It is by far the largest financial market in the world. OTC markets are larger and more diversified than ever, owing in part to the rise of electronic and automated trading While trading continues to be dominated by the major currencies, in particular the US dollar and the euro, in FX markets the trading of emerging market currencies is growing faster than that of major currencies. The rise in electronic and automated trading is one of the key features of today’s foreign exchange markets.

Foreign exchange accounting or FX accounting consists in reporting, in a company’s presentation currency, all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies. The rules that govern foreign exchange accounting are devised by accounting associations such as the Financial Accounting Standards Board (FASB). It is important not to confuse foreign exchange accounting, applicable to all companies that transact in foreign currencies with ‘Hedge Accounting’, an optional technique that modifies the normal accounting basis for recognising gains and losses on associated hedging instruments and hedged items, so that both are recognised in P&L (or OCI) in the same accounting period.

A foreign exchange broker, also known as an FX broker or a forex broker, buys and sells currencies on behalf of clients while charging a commission for the service. Foreign exchange brokers are ‘middlemen’ who match the currency buy and sell orders from their clients to other clients orders. A foreign exchange broker will guarantee that trades will be actually settled, avoiding the need for buyers and sellers to check each other’s creditworthiness. Thanks to a wide range of connections with liquidity providers (mostly banks) and dealers, a foreign exchange broker will usually get preferential exchange rates that can be passed on to clients at low spreads.