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Explain exposure to foreign currency transactions, including how the resulting gains and losses are accounted for and disclosed

CFA® Level II · Financial Statement Analysis · Multinational Operations · L2.FSA.3.b

The idea

A company that sells or buys on credit in a foreign currency, or borrows in one, is exposed from the transaction date until settlement. At each balance sheet date the receivable or payable is restated at the current rate and the change is recognised in profit or loss, before any cash moves. Exporters with foreign currency receivables gain when the foreign currency strengthens; importers with foreign payables lose. Neither IFRS nor US GAAP says where the gain or loss sits in the income statement, so some firms show it in operating profit and others below it, which hurts comparability of operating margins. The trap is waiting for settlement to book the gain or loss.

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