Foreign currency exposure on imports and exports

Import-dependent manufacturers routinely carry large open USD/EUR payables and LC exposures against local-currency revenue and cash flows; retranslation at closing rates flows directly through profit or loss every period, and a single sharp devaluation (as seen repeatedly in EGP) can wipe out a full year's operating margin or turn a profitable quarter into a loss, making this a top misstatement and earnings-volatility risk in the sector.

What proportion of costs is FX-denominated versus the entity's revenue currency, and are open USD/EUR payables or LC liabilities retranslated at the closing rate each reporting date? Which exchange rate is used when official and parallel/informal rates diverge or convertibility is restricted? Is the resulting FX gain or loss correctly recognized in profit or loss (not adjusted into inventory cost already recorded)?

1. Identify the functional currency of the entity (usually SAR/EGP/AED based on the primary economic environment), not just the invoice currency.
2. Record all import purchases and export sales at the spot rate on the transaction date.
3. Classify USD/EUR payables, receivables and outstanding letter-of-credit (LC) liabilities as monetary items.
4. At each reporting date, retranslate all open monetary items at the closing rate; recognize the resulting FX gain or loss in profit or loss (finance/FX line), not in revenue or cost of sales.
5. Do not adjust the cost of inventory already recorded for subsequent exchange rate movements on the related payable - once inventory cost is fixed at the transaction-date rate, later FX movements are a financing item.
6. Where multiple official/parallel rates exist, select and consistently apply the rate at which the entity can actually settle the obligation, and document the basis.

Monetary items (cash, receivables, payables, LC liabilities in foreign currency) are retranslated at the closing spot rate at each reporting date; non-monetary items already measured at historical cost (e.g. inventory, PP&E) are not retranslated for subsequent FX movements once initially recorded. Where official and parallel/informal rates diverge, or transferability/convertibility is restricted, use the rate at which the entity could realistically settle the transaction or repatriate funds, not necessarily the official published rate, with the judgment and its basis disclosed. Re-measurement is triggered at every reporting date for open monetary balances, and immediately on settlement (realized FX gain/loss) when the item is paid or collected.

Present net FX gains/losses on operating monetary items within finance costs/income or a clearly labelled separate line, applied consistently period to period; disclose the accounting policy for functional currency determination and rate selection; disclose the amount of net FX gain/loss recognized in profit or loss for the period; disclose qualitative and, where practicable, quantitative sensitivity to major currency exposures (e.g. a reasonably possible devaluation scenario); disclose any exchange restrictions or rate multiplicity affecting realizability of foreign balances.

• Leaving USD-denominated LC liabilities and payables at historical rates instead of retranslating at each period end
• capitalizing post-purchase-date devaluation losses into inventory cost rather than expensing through P&
• L
• netting FX gains and losses from unrelated exposures/counterparties without disclosure, obscuring the true exposure
• using an official rate for translation when the entity can only realistically settle at a parallel/black-market rate
• treating advances to suppliers denominated in foreign currency as monetary when they are actually non-monetary prepayments for goods (and therefore should not be retranslated).