Academic journal article Global Economic Observer

Exchange Rate Differences-The Accounting Treatment and Its Influence on the Financial Performance of an Economic Entity

Academic journal article Global Economic Observer

Exchange Rate Differences-The Accounting Treatment and Its Influence on the Financial Performance of an Economic Entity

Article excerpt

1. Introduction

The relationships that economic units have with customers, suppliers and lenders generate debt rights and payment obligations or commitments. Depending on the field of activity, some or all transactions with customers and/or suppliers may be in foreign currency. Some economic units resort to foreign currency loans to finance their working activity. The accounting law stipulates that all transactions in foreign currencies be expressed in Romanian currency (lei), at the exchange rate displayed by the National Bank of Romania, an exchange rate that may undergo alterations from the date of lodging the claim/debt in foreign currency and the time of settlement. Therefore, exchange rate differences may appear.

The study undertaken aims at presenting the concept of exchange rate differences, the possible situations that arise, their recognition in accounting in accordance with the national mies in force, as well as their influence on the financial performance of an economic unit.

The importance of this study lies in highlighting the impact of exchange rate differences on the results obtained by an economic unit and presented through the profit and loss account indicators.

In order to highlight the impact of exchange rate differences on the accountant results and, consequently, on the performance of an economic unit, we have analyzed the situation of a company having foreign currency long-term loans, receivables and payables to suppliers.

Regardless of the business field, an economic unit must be competitive in order to remunerate its production factors and ensure its development.

The term "performance", as supplied by general language dictionaries, is referred to as an accomplishment in a specific field of activity. At the level of an economic unit, performance include the ability to gain access to resources, to allocate and optimally use them with a view to make sufficient payments to cover the risk undertaken and to justify the interest, on the trajectory of future sustainable development. [1] Therefore, the economic performance of a unit lies in the efficiency and effectiveness with which resources are used and results are generated. Efficiency involves maximizing the results of an activity in relation to the resources used, while the effectiveness shows the degree of achievement for the scheduled objectives, as well as the relationship between the provisioned effect and the outcome of the activity carried out.

The assessment of the financial performance can be equally achieved by means of profitability indicators. The first step in the evaluation of profitability is to determine the results as the difference between the income and the consumption of resources pertaining to it. The main result indicators from the profit and loss account of an economic unit are the operation result, the financial result and the gross result of the exercise.

The operating result represents the difference between the operating revenue and the expenditure of the resources allotted to the operation, while the financial result is determined by deducting the financial expenditure from the financial revenue. The two results, the operation and the financial ones summed up, form the gross result of the exercise or the accounting result.

The accounting profit provides information relating to the company's ability to control costs and to achieve revenue that is higher than the expenditure. [2]

The exchange rate differences may be financial income or expenses, as appropriate. Therefore, their existence and amount influence the financial result and, consequently, the gross profit of the exercise.

2. Currency Rate Differences - Accounting Treatment

In order to carry out activity, some economic units make foreign currency transactions. Foreign currency represents any currency, but the national one.

In Romania accounting is held in the national currency, therefore foreign currency transactions must be initially recorded at the exchange rate communicated by the National Bank of Romania on the date of the transaction. …

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