Foreign currency transactions and translation

Even with SAR's long-standing USD peg, contractors carry material exposure through non-USD/SAR currencies (e.g. EUR-denominated equipment purchases, other GCC or Asian subcontractor payment currencies), and failing to recognize exchange differences on monetary items as they arise, or misclassifying capital-account items, misstates both period profit/loss and the carrying amount of foreign-currency payables and loans.

Are significant contract costs, equipment purchases, or borrowings denominated in a currency other than your functional currency, such as EUR equipment invoices or other GCC or Asian subcontractor payment currencies? Is exposure actually concentrated in a third currency that floats against SAR rather than being neutralized by the SAR/USD peg? Are foreign-currency monetary items, such as payables, receivables, and loans, retranslated at the closing rate at each reporting date with the exchange difference taken to profit or loss? Are non-monetary items correctly left at their historical transaction-date rate rather than retranslated?

1. Determine each transaction's functional currency treatment: record foreign currency transactions initially at the spot rate on the transaction date.
2. At each reporting date, translate monetary items (foreign currency payables, receivables, loans) at the closing rate; leave non-monetary items measured at historical cost at the transaction-date rate.
3. Recognize exchange differences arising on settlement of monetary items or on translation at rates different from initial recognition in profit or loss in the period, except for the limited cases of qualifying net investment hedges (recognized in OCI) or exchange differences eligible for capitalization as borrowing costs under specific circumstances.
4. For committed foreign-currency purchase orders for imported equipment, assess whether any hedge accounting designation is in place and, if not, recognize the full spot-rate exposure through P&L as rates move.
5. Reconcile foreign-currency creditor and loan balances to actual contractual terms each period to ensure the correct monetary amount is being retranslated.

Translate foreign currency monetary assets and liabilities at the closing spot rate at each reporting date; non-monetary items carried at historical cost remain at the exchange rate ruling at the transaction date, while non-monetary items carried at fair value are translated at the rate ruling when fair value was determined. For a foreign-currency loan, recompute the SAR carrying amount at each reporting date and recognize the resulting exchange difference in P&L (or capitalize as a borrowing cost adjustment only in the narrow circumstances permitted).

Disclose: (1) the amount of net exchange differences recognized in profit or loss for the period; (2) exchange differences recognized in OCI relating to qualifying net investment hedges, if any; (3) significant foreign-currency monetary exposures (by currency) and how they arise (equipment imports, subcontractor payments, foreign-currency loans); (4) the entity's policy on managing foreign-currency risk, including any hedging arrangements.

• Assuming the SAR/USD peg eliminates all foreign currency exposure and therefore not tracking or retranslating EUR, GBP or other non-USD-linked currency payables and loans
• failing to retranslate foreign-currency monetary balances at each reporting date and instead only recognizing exchange differences on actual cash settlement
• incorrectly capitalizing routine exchange losses on operating payables into asset cost as if they were borrowing costs
• misclassifying a foreign-currency loan used for general working capital as eligible for net investment hedge accounting without meeting the specific IFRS 9/IAS 21 hedge accounting criteria
• using an average rather than closing rate for period-end retranslation of monetary items.