As businesses engage in international trade, they encounter fluctuations in foreign currency exchange rates. These fluctuations give rise to two accounting concepts: realized and unrealized foreign exchange (FX) differences.
What is Realized FX?
Realized FX arises when a foreign currency transaction is completed which is the payment made or received, and the transaction is settled. The difference between the exchange rate at the transaction date and the rate at the settlement date results in a gain or loss.
Example:- Invoice issued to a US customer at US = RM4.50.
- Customer pays later when US = RM4.60.
- The 10cent difference per US$ is a realized gain.
Let’s assume:
- Invoice Amount: US,000
- At invoice time (RM4.50):
- At payment time (RM4.60):
- Forex Gain = RM1,000 (Realised)
What is Unrealized FX?
Unrealized FX occurs when a foreign currency transaction remains outstanding at the reporting date. Companies must revalue these open balances (e.g., trade receivables, payables, loans) using the closing exchange rate. The resulting difference is an unrealized gain or loss.
Example:- At month end, a US$ 10,000 receivable is revalued at the new exchange rate.
- If the rate changes from RM4.50 to RM4.55, a paper gain of RM500 is recognized.
Why It’s Important
- Provides a true and fair view of financial performance.
- Helps management and stakeholders understand how currency fluctuations impact profitability.
- Important for risk management in businesses with large foreign currency exposure.
Realized FX reflects the actual impact of currency movements once transactions are settled, while unrealized FX shows potential exposure at reporting dates. Recognizing both ensures accurate reporting, stronger risk management, and clearer financial insights.
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