Exchange gains and losses that arise during revaluation may be treated as permanent or temporary, depending on which of the following exchange gain/loss accounting methods you use:
- Realized and Unrealized Gain/Loss
- Recognized Gain/Loss
The exchange gain/loss accounting method affects the revaluation of documents in Accounts Receivable and Accounts Payable, and the revaluation of monetary balances denominated in nonfunctional currencies in General Ledger.
Note: Regardless of the exchange gain/loss accounting method you use, all exchange gains or losses arising upon settlement of documents are considered permanent, and they are included in income for the period in which you post them.
Realized and Unrealized Gain/Loss
If you use this accounting method, exchange gains and losses that result from fluctuations in exchange rates are considered unrealized until the transactions are settled.
At each balance sheet date, you revalue outstanding balances that are denominated in foreign currencies. Any exchange gains or losses calculated during revaluation are posted to unrealized exchange gain and unrealized exchange loss accounts, and the balance sheet is stated using current rates.
However, because exchange rate fluctuations are considered temporary, unrealized gains or losses are not taken into net income, and they are reversed in the next period.
When transactions are settled, exchange gains and losses are considered permanent, and are taken into income in that period.
Recognized Gain/Loss
If you use this accounting method, exchange gains and losses are recognized when documents are revalued using the exchange rate in effect at the revaluation date (usually the balance sheet date), or when they are settled.
All exchange gains and losses are considered permanent, whether they arise during revaluation or upon settlement, and they are not reversed in the next period. They are posted to exchange gain and exchange loss accounts, and are included in income (they appear on the income statement, and they are subject to tax) for the current period.