TaxTMI 
TaxTMI 
TaxTMI 
1. Meaning of Foreign Exchange Fluctuation
In international trade, transactions are often denominated in foreign currencies such as USD, EUR, GBP, or JPY. The value of one currency against another changes frequently due to variations in global demand, supply, interest rates, inflation, and political conditions.
This change in the exchange rate between the date of transaction and the date of settlement gives rise to foreign exchange fluctuations.
Example
If an Indian exporter sells goods worth USD 10,000 at Rs. 83 per USD on 1st July:
- Export value = Rs. 8,30,000.
If the payment is received on 30th August when the exchange rate is Rs. 84 per USD: - Actual amount received = Rs. 8,40,000.
- Exchange Gain = Rs.10,000 (84 – 83 × 10,000).
Similarly, if the rate fell to Rs.82, the exporter would face a loss of Rs.10,000.
2. Causes of Foreign Exchange Rate Fluctuations
Factor | Explanation |
Demand and Supply of Currency | Increased imports raise demand for foreign currency, increasing its value. |
Inflation Rate Differences | A country with higher inflation tends to see depreciation in its currency. |
Interest Rate Differentials | Higher interest rates attract foreign investment, strengthening the currency. |
Political and Economic Stability | Stable economies attract investors, boosting currency value. |
Speculation and Capital Flows | Traders buying/selling currencies expecting appreciation/depreciation influence rates. |
Government Policies and RBI Interventions | Central banks may intervene to stabilize exchange rates. |
3. Foreign Exchange Fluctuations in International Trade Transactions
In import–export business, these fluctuations affect:
- Exporters: When payment is received later, a stronger rupee reduces revenue.
- Importers: When payment is made later, a weaker rupee increases liability.
- Foreign currency loans or advances (buyers’/suppliers’ credit) are also impacted.
Transaction Stages Affected:
- At the date of transaction – Record using the rate on that date.
- At the date of balance sheet (if unpaid) – Restate foreign currency balances at closing rate.
- At the date of settlement – Record actual gain or loss based on the settlement rate.
4. Accounting Treatment of Foreign Exchange Fluctuations
Accounting treatment is governed by:
- AS-11 (Accounting Standard 11) – The Effects of Changes in Foreign Exchange Rates (for non-Ind AS entities).
- Ind AS 21 – The Effects of Changes in Foreign Exchange Rates (for Ind AS compliant companies).
A. Initial Recognition (at Transaction Date)
All foreign currency transactions are recorded in the books using the exchange rate prevailing on the date of transaction.
Journal Entry (Exporter):
Accounts Receivable (Debtors) A/c Dr. Rs.8,30,000
To Sales A/c Rs.8,30,000
(Being export made at Rs.83 per USD)
B. Adjustment at Balance Sheet Date
If the payment is not received by the year-end, the outstanding foreign currency balance (assets or liabilities) is revalued at the closing rate on the balance sheet date.
If exchange rate increases (exporter’s gain):
Accounts Receivable (Debtors) A/c Dr. Rs.10,000
To Exchange Gain A/c Rs.10,000
If exchange rate decreases (exporter’s loss):
Exchange Loss A/c Dr. Rs.10,000
To Accounts Receivable (Debtors) A/c Rs.10,000
These gains or losses are recorded in the Profit and Loss Account under “Other Income” or “Other Expenses.”
C. At the Time of Settlement
On actual receipt/payment, compare the amount received with the revalued balance.
Example (Exporter):
If balance sheet date rate = Rs.84, and actual receipt at Rs.85:
- Additional gain of Rs.10,000 (Rs.1 × 10,000 USD).
Journal Entry:
Bank A/c Dr. Rs.8,50,000
To Accounts Receivable A/c Rs.8,40,000
To Exchange Gain A/c Rs.10,000
D. Treatment in Case of Importers
For importers (foreign payable), the effect is opposite.
Exchange Rate Movement | Effect on Importer |
Rupee Depreciates (per USD) | Loss – more rupees needed to pay liability |
Rupee Appreciates ( per USD) | Gain – fewer rupees needed to settle liability |
5. Disclosure Requirements
As per AS-11 / Ind AS 21, companies must disclose:
- Amount of exchange differences recognized in profit or loss.
- Foreign currency monetary assets and liabilities at reporting date.
- Accounting policy adopted for foreign exchange translation.
6. Impact on Profit and Loss Account
Foreign exchange fluctuation affects the Profit and Loss (P&L) Account in two ways:
Type | Account Head | Impact |
Exchange Gain | Other Income / Forex Gain | Increases profit |
Exchange Loss | Other Expenses / Forex Loss | Decreases profit |
These impacts can significantly alter reported earnings, especially for businesses with large foreign currency exposure (exporters, importers, foreign loans, etc.).
Example Summary in P&L
Particulars | Amount (Rs.) |
Sales Revenue | 8,30,000 |
Add: Exchange Gain | +20,000 |
Total Income | 8,50,000 |
(or) | |
Sales Revenue | 8,30,000 |
Less: Exchange Loss | –20,000 |
Total Income | 8,10,000 |
Thus, foreign exchange movement directly influences profitability and valuation of assets/liabilities.
7. Strategies to Manage Foreign Exchange Risk
- Forward Contracts: Lock exchange rate for future date.
- Options and Futures: Use derivatives to hedge currency exposure.
- Netting and Matching: Offset receivables and payables in the same currency.
- Natural Hedge: Match currency inflows with outflows.
- Foreign Currency Accounts: Maintain balances in foreign currencies to avoid frequent conversions.
8. Conclusion
Foreign exchange fluctuations are an inherent part of international trade, affecting both exporters and importers. Proper accounting under AS-11 or Ind AS 21 ensures that gains or losses are recognized transparently and reflected in the Profit and Loss Account. While favorable movements can enhance profitability, adverse movements can erode margins. Therefore, effective currency risk management, supported by sound accounting practices, is vital for financial stability and sustained performance in global trade.
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Annexure – A
Here’s a step-by-step numerical illustration (for both exporter and importer cases) showing:
- Exchange rate changes,
- Journal entries,
- Accounting treatment, and
- Impact on Profit & Loss Account.
Foreign Exchange Fluctuation – Numerical Example with Accounting Treatment
Case 1: Exporter (Foreign Currency Receivable)
Transaction Details
Particular | Details |
Export Date | 1st August 2025 |
Goods Sold | USD 10,000 |
Exchange Rate on 1 Aug 2025 | Rs. 83 per USD |
Balance Sheet Date (31 March 2026) Rate | Rs. 84 per USD |
Actual Receipt Date (30 April 2026) Rate | Rs. 85 per USD |
Step 1 – At the Time of Sale (1st August 2025)
Export sale is recorded using the rate on the transaction date.
Calculation:
USD 10,000 × Rs. 83 = Rs.8,30,000
Journal Entry
Accounts Receivable (Foreign Debtor) A/c Dr. Rs.8,30,000
To Export Sales A/c Rs.8,30,000
(Being goods sold to foreign customer at Rs.83 per USD)
Step 2 – At the Balance Sheet Date (31st March 2026)
Outstanding foreign receivable is revalued at the closing rate Rs.84.
Gain due to fluctuation:
(Rs.84 – Rs.83) × 10,000 = Rs.10,000
Journal Entry
Accounts Receivable (Foreign Debtor) A/c Dr. Rs.10,000
To Exchange Gain A/c Rs.10,000
(Being unrealized exchange gain due to increase in USD rate)
This Rs.10,000 will appear in the Profit & Loss Account under “Other Income – Exchange Gain.”
Step 3 – At the Time of Actual Receipt (30th April 2026)
Payment received at Rs.85 per USD.
Gain from 31 March to 30 April:
(Rs.85 – Rs.84) × 10,000 = Rs.10,000
Journal Entry
Bank A/c Dr. Rs.8,50,000
To Accounts Receivable A/c Rs.8,40,000
To Exchange Gain A/c Rs.10,000
(Being foreign currency received at Rs.85 per USD)
Impact on Profit & Loss Account (Exporter)
Particulars | Amount (Rs.) |
Export Sales | 8,30,000 |
Add: Exchange Gain (31 March) | +10,000 |
Add: Exchange Gain (30 April) | +10,000 |
Total Income Recognized | Rs.8,50,000 |
Exporter’s Profit Increases by Rs.20,000 due to favorable rupee depreciation.
Case 2: Importer (Foreign Currency Payable)
Transaction Details
Particular | Details |
Import Date | 1st August 2025 |
Goods Purchased | USD 10,000 |
Exchange Rate on 1 Aug 2025 | Rs.83 per USD |
Balance Sheet Date (31 March 2026) Rate | Rs.84 per USD |
Actual Payment Date (30 April 2026) Rate | Rs.85 per USD |
Step 1 – At the Time of Purchase (1st August 2025)
Purchase recorded at transaction rate Rs.83.
Value: USD 10,000 × Rs.83 = Rs.8,30,000
Journal Entry
Purchases A/c Dr. Rs.8,30,000
To Foreign Supplier (Creditors) A/c Rs.8,30,000
(Being goods purchased on credit at Rs.83 per USD)
Step 2 – At the Balance Sheet Date (31st March 2026)
Outstanding payable revalued at closing rate Rs.84.
Loss due to fluctuation:
(Rs.84 – Rs.83) × 10,000 = Rs.10,000
Journal Entry
Exchange Loss A/c Dr. Rs.10,000
To Foreign Supplier (Creditors) A/c Rs.10,000
(Being unrealized exchange loss on foreign payable)
Rs.This Rs.10,000 will appear in the Profit & Loss Account under “Other Expenses – Exchange Loss.”
Step 3 – At the Time of Actual Payment (30th April 2026)
Payment made at Rs.85 per USD.
Additional loss:
(Rs.85 – Rs.84) × 10,000 = Rs.10,000
Journal Entry
Foreign Supplier (Creditors) A/c Dr. Rs.8,40,000
Exchange Loss A/c Dr. Rs.10,000
To Bank A/c Rs.8,50,000
(Being payment made at Rs.85 per USD)
Impact on Profit & Loss Account (Importer)
Particulars | Amount (Rs.) |
Purchases | 8,30,000 |
Add: Exchange Loss (31 March) | +10,000 |
Add: Exchange Loss (30 April) | +10,000 |
Total Expense Recognized | Rs.8,50,000 |
Importer’s Cost Increases by Rs.20,000 due to unfavorable rupee depreciation.
Summary: Impact of Exchange Rate Movement
Situation | Effect on Exporter (Receivable) | Effect on Importer (Payable) |
Rupee Depreciates ( per USD) | Gain | Loss |
Rupee Appreciates ( per USD) | Loss | Gain |
Accounting Summary (Simplified Table)
Event | Journal Entry (Exporter) | Journal Entry (Importer) |
Transaction | Dr. Debtors / To Sales | Dr. Purchases / To Creditors |
Year-End Revaluation | Dr. Debtors / To Gain (if )or Dr. Loss / To Debtors (if ) | Dr. Loss / To Creditors (if )or Dr. Creditors / To Gain (if ) |
Settlement | Dr. Bank / To Debtors (+/- Gain/Loss) | Dr. Creditors (+/- Loss/Gain) / To Bank |
Conclusion
Foreign exchange fluctuations directly affect an enterprise’s profitability and financial position.
- Exporters gain when the domestic currency depreciates,
- Importers lose under the same condition.
Accurate accounting, in compliance with AS-11 / Ind AS 21, ensures these effects are transparently reflected in the Profit and Loss Account.
Businesses often manage this exposure through hedging instruments (forwards, options, swaps) to stabilize cash flows and protect margins.
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