Multi-currency Example Transactions
The following examples illustrate a few multi-currency transactions and what type of entries are created for each.
Example 1: Foreign currency contract with an upfront invoice for the total contract value
On 12/15/2020, an entity enters into a foreign currency subscription contract with a customer for 3 months starting from 1/1/2021. The customer is billed via an invoice on 12/15 for the entire contract value of EUR 300 (EUR 100/month) which is payable by 1/15/21. The home currency is USD and the exchange rate on 12/15/2020 is USD 1.2 /EUR.
On 12/31, the entity has an outstanding A/R balance of EUR 300. The exchange rate on 12/31/2020 is USD 1.19/EUR, resulting in a decrease of USD3.00 on A/R due to the decrease in value in home currency against the foreign currency since the invoice day. Note this re-measurement process is handled in Accounting System and is self-reversed next month.
On 1/15 a Euro 300 payment is received and converted at the exchange rate of USD 1.185 /EUR, for a total of USD 355.50. The accounting system recognizes the payment and foreign currency loss due to loss of value in home currency against foreign currency.
On 1/31, RevRec recognizes revenue based on obligation performance, at USD 1.2/ EUR (the original foreign exchange rate as of the contract establishment date). The foreign currency rate changes do not have any impact on revenue recognition.
Month 3 (2/28) and month 4 (3/31)
In this month similar to Month 2, RevRec continues to recognize revenue based on the original foreign exchange rate as of the contract date.
Example 2: Foreign currency contract with monthly upfront invoices
On 1/1/2021, an entity enters into a foreign currency contract with a customer for EUR 100/month for 2-month term starting from 1/1/2021. The plan includes 2 monthly pre-billed invoices, with the first EUR 100 payable on 1/1/2021. The home currency is USD and the exchange rate on 1/1/2021 is USD1.2/EUR.
On 1/1. a payment of EUR 100 is received and converted to USD at the exchange rate of USD 1.20/Euro. There is no gain/loss from foreign currency as the payment is received on the same day as the invoice.
On 1/31, RevRec recognizes the earned revenue based on the foreign currency rate as of the contract date.
On 2/1, the invoice for month 2 of EUR 100 is billed, with the FX rate at USD 1.21/ EUR. The accounting system records the A/R and revenue at USD 121. RevRec re-classes USD 121 out of the revenue into the deferred revenue.
On 2/1, EUR 100 payment is received and converted to USD at exchange rate of USD 1.21/Euro. Similarly, there was no foreign currency gain loss associated with the payment, as the payment is received immediately.
On 2/28, RevRec processes revenue recognition. Revenue recognition is based on the foreign exchange rate as of the invoice date and treats the invoice date as the transaction date. The FX impact is recognized as revenue directly.
Another accounting view is not to book the FX rate change impact through revenue but recognize it as gain.loss.
If you would like to use this approach please talk speak with the RevRec support team and ask for early access to this feature.
Updated on: 13/01/2022