Foreign-currency supplier bills: separate the bill, remeasurement and payment
A UK business whose functional currency is sterling buys routine services from a supplier in the euro area. It recognises a EUR 10,000 bill on 15 September and pays it in October. By the time the payment clears, the ledger has carried that one bill at three sterling amounts: on the day it was booked, at the September close and when it left the bank. All three can be right. Errors start when the gaps between them are booked as changes in the cost of the service, or when the same gap is booked twice.
Start with the functional currency
Under IAS 21, an entity's functional currency is the currency of the primary economic environment in which it generates and spends cash. Any other currency is a foreign currency. The standard covers three separate situations: foreign-currency transactions, foreign operations and presenting statements in a different currency. This guide deals only with a transaction.
The example is a book measurement under IFRS. It does not describe UK or US tax rules or US GAAP. It assumes an ordinary monetary trade payable, a currency that can be exchanged and no hedge accounting. Advances, derivatives, VAT, bank fees, hyperinflation and foreign operations are outside it.
Sources and context, checked :
Three measurement points
Paragraphs 21 and 22 of IAS 21 require initial recognition at the spot rate on the transaction date, meaning the date the transaction first qualifies for recognition. That is not automatically the invoice date. An average rate can approximate actual rates, but not when rates fluctuate significantly.
Paragraph 23 translates monetary items, such as an unpaid supplier bill, at the closing rate at each reporting date. Non-monetary items carried at historical cost keep the transaction-date rate, so not every foreign-currency balance is retranslated. Under paragraphs 28 and 29, exchange differences on settling or retranslating monetary items generally go to profit or loss in the period they arise, subject to exceptions this example does not involve. When settlement falls in a later period, each period records the change in rates during that period.
Sources and context, checked :
A worked example in sterling
The rates are invented for illustration and quoted as GBP per EUR 1. By assumption, recognition happens on the invoice date.
| Event | Rate | GBP amount | Entry |
|---|---|---|---|
| 15 September: recognition | 0.84 | 8,400 | Debit service expense 8,400; credit payable 8,400 |
| 30 September: reporting date | 0.86 | 8,600 | Increase payable by 200; exchange loss 200 |
| October: settlement | 0.85 | 8,500 | Debit payable 8,600; credit bank 8,500 and exchange gain 100 |
Where the same movement gets counted twice
The service expense stays at 8,400. The supplier is owed EUR 10,000 throughout; only its sterling measurement moves. Net exchange loss is 200 - 100 = 100, which equals the 8,500 paid less the 8,400 originally recognised.
A common slip is measuring the settlement difference from the original 8,400 while keeping September's 200 loss. That books a 100 loss in October, takes total losses to 300 and leaves a 200 credit on the payable for a bill already paid.
If the chosen process reverses September's revaluation on 1 October, October shows a 200 gain from that reversal and a 100 loss on settlement against 8,400, still a net 100 gain. Check what the software actually posted before adding a manual journal.
The record to keep with each bill
We recommend reconciling two quantities separately: the euros owed, which should agree with the supplier's statement in euros, and their sterling carrying amount. Keep these together:
- Transaction currency, amount and recognition date
- Rate used, its source and its direction, such as GBP per EUR 1
- Closing rate and the remeasurement posted at each reporting date
- Payment evidence tying the settlement to the payable and the bank
One line that proves the settlement
For this fee-free example: 8,400 + 200 - 100 = 8,500, the sterling cash paid. If the statement shows a separately identified bank fee, reconcile it as its own item. A conversion spread built into the rate may not appear as a fee at all. Matching the payment to the bank statement remains a job for the bank reconciliation.