Obviously, as time progresses, exchange rates fluctuate. Purchasing stock involves a series of events spread over a period of time, and these events don’t always occur in a predictable sequence.
- Ordering the goods
- Receiving an invoice for the goods
- The goods leaving port
- Physically receiving the goods
- Paying the invoice
So, what’s appropriate and what’s useful?
From a historical cost point of view The Australian Accounting Standards Board (AASB 102) requires stock to be valued at the lower of cost and net realisable value on an item by item basis. The cost price of stock is the total cost involved in bringing stock to its present location and condition ready for sale. Internationally, you will find that the various standards bodies and legal requirements are very similar.
For valuation purposes it is appropriate to apply the exchange rate at any of, the day of export of the goods, day of receipt, or day of invoice. The customs department in Australia requires the exchange rate to be the day of export, but this is only for the calculation of duty. The valuation of the stock on the balance sheet can be different. This highlights the fact that multiple valuations may be used for different purposes, it is not always about the balance sheet value.
Also, if the exchange rate at invoice payment is different from the exchange rate when the invoice was received the difference can be applied to the valuation, offset against the exchange loss or gain occurring at the payment, and applied to an inventory revaluation reserve.
Conservatively, the exchange rate is often based on the first event occurring at the receipt site, either the invoice receipt or the goods receipt.
The next question is where to get the exchange rate from. Is it a government published rate, a bank rate, or a rate on a foreign currency contract?
Again, there is a lot of flexibility allowed by both accounting standards and government departments. A useful summary is given by the Australian Tax Office ruling Goods and Services Tax: foreign exchange conversions.
Foreign exchange rates
20. The particular exchange rate that you choose may be an agreed rate or may come from one of the following sources:
- a foreign exchange organisation (for example, a commercial bank); or
- the Reserve Bank of Australia (RBA).
21. You can choose a particular exchange rate from the publicly available rates of a foreign exchange organisation. For example, an exchange rate can be:
- a 'buying', 'selling' or 'spot' rate from a commercial bank; or
- a rate under a foreign exchange contract , or
- a rate based on an averaging of a foreign currency exchange rate if your use of that rate conforms with the relevant accounting standard or you use that rate for income tax purposes
So, in amongst all of this flexibility you have some decisions to make.
However you apply exchange rates to imported goods should suit your business and generally reflect a true and fair value of the goods.
How do you process exchange rates on imports, and why did you choose your method?