# Exchange Rates

Question: Exchange rates that vary over time create a reporting problem for companies working in international

markets. To illustrate, assume a U.S. company makes a sale of a service to a Mexican company on December 9,

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Year One, for 100,000 Mexican pesos that will be paid at a later date. The exchange rate when the sale was made

is assumed to be 1 peso equal to \$0.08. However, by the end of Year One when financial statements are produced,

the exchange rate has changed to 1 peso being equal to \$0.09. What reporting does a U.S. company make of

transactions that are denominated in a foreign currency if the exchange rate changes as time passes?1

Answer: At the time of the sale, reporting is easy. The 100,000 pesos has the equivalent value of \$8,000 (100,000

pesos × \$0.08) so that the following journal entry can be produced. Even though 100,000 pesos will be physically

received, \$8,000 is reported so that all balances on the seller’s financial statements are stated in terms of U.S. dollars.

By the end of the year, the exchange rate is 1 peso equal to \$0.09. The Mexican peso is worth a penny more

relative to the U.S. dollar. Thus, 100,000 pesos can now be changed into \$9,000 (100,000 × \$0.09). When

adjusting entries are prepared in connection with the production of financial statements, one or both of the above

account balances could remain at \$8,000 or be updated to \$9,000. The sale took place when the exchange rate was

\$0.08 but, now, before the money is collected, the peso has risen in value to \$0.09. FASB had to set a standard

rule as to whether the current rate or the historical rate was appropriate for reporting foreign currency balances.

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