Foreign-currency advances: keep a rate for each prepayment
A buyer pays two euro advances before goods arrive. At delivery, neither advance is translated again at the latest rate. Each non-monetary historical-cost prepayment retains its own recognition-date rate; the unpaid portion starts at the delivery-date rate on the assumptions below. Keeping those portions separate explains both the inventory cost and the later exchange loss.
Read what the advance entitles you to receive
This example uses UK-adopted full IFRS, a sterling functional currency and exchangeable euros. It covers ordinary purchased goods measured at historical cost. VAT, fees, hedging, financing, foreign operations, hyperinflation and tax are outside the example.
IAS 21 distinguishes a right to a fixed or determinable amount of currency from a right to goods or services. An ordinary prepayment settled in goods is non-monetary. A deposit refundable as a fixed cash amount needs a different assessment. Its ledger name cannot settle that question.
IFRIC 22 addresses advance consideration that first creates a non-monetary asset or liability. The initial recognition date of that advance determines the transaction date for the related portion when it is released. Multiple advances require separate dates. It does not decide when the goods themselves qualify for recognition.
Keep the two advances at their original rates
All prices, dates and rates here are hypothetical. Goods cost EUR10,000. The buyer pays EUR3,000 on 1 September at £0.84 per EUR1, then EUR2,000 on 15 September at £0.85. Both payments create non-monetary prepayments for goods, with no right to a fixed cash refund.
The advances are £2,520 and £1,700, totalling £4,220. Assume a 30 September reporting-date rate of £0.88 per EUR1. Their historical-cost balance remains £4,220. Translating EUR5,000 at £0.88 would create £4,400 and an unsupported £180 movement.
IAS 21 requires reporting-date retranslation of monetary balances, while historical-cost non-monetary items retain transaction-date rates. Applying one closing rate to every foreign-currency ledger balance loses that distinction.
Recognise the purchase, then settle the payable
Assume the goods qualify for recognition on 1 October, when the spot rate is £0.86 per EUR1. The remaining EUR5,000 becomes an unconditional payable. Combine its £4,300 initial amount with the £4,220 retained prepayments to obtain inventory cost of £8,520.
Record Dr inventory £8,520; Cr prepayments £4,220; Cr payable £4,300. Using the delivery-date rate for the entire EUR10,000 would instead record £8,600, overstating inventory by £80.
The buyer settles on 15 October at £0.87 per EUR1 and pays £4,350. Record Dr payable £4,300; Dr exchange loss £50; Cr bank £4,350. Ordinary monetary-item exchange differences enter profit or loss in this example. There is no assumed exception.
Total cash is £2,520 + £1,700 + £4,350 = £8,570. That agrees to inventory of £8,520 plus the £50 exchange loss. Subsequent inventory valuation tests still need separate consideration.
| Portion | Rate per EUR1 | Sterling amount |
|---|---|---|
| First advance, EUR3,000 | £0.84 | £2,520 |
| Second advance, EUR2,000 | £0.85 | £1,700 |
| Unpaid amount on delivery, EUR5,000 | £0.86 | £4,300 |
| Initial goods cost | Mixed retained rates | £8,520 |
Sources and context, checked :
- UK Endorsement Board: IFRIC 22 - Foreign Currency Transactions and Advance Consideration, paragraphs 4 to 9
- UK Endorsement Board: IAS 21 - The Effects of Changes in Foreign Exchange Rates, paragraphs 21 to 23, continued page 10
- UK Endorsement Board: IAS 21 - The Effects of Changes in Foreign Exchange Rates, paragraphs 28 to 29
Make the rate trail reviewable
A useful prepayment schedule keeps the foreign amount, recognition date, rate direction and sterling cost for each payment. On delivery, release each portion at its retained amount and recognise the unpaid balance separately. Reconcile settlement cash to the purchase cost and actual payable exchange movement. These are suggested controls; a genuine fixed-cash refund right requires revisiting the classification before using this method.