Foreign Currency Retranslation ‐ Gains and losses in foreign currency

Problem Statement

For e.g. You have 1000 EUR, you buy 90,000 INR at 1 EUR = 90 INR. After a period of time INR depreciates to 1 EUR = 100 INR.

Net worth calculation via entries shows that you transferred 1000 EUR, so you have 1000 EUR now, notwithstanding the exchange rate of purchase. However, Net worth calculation via account balances show you have only 900 EUR, as held 90,000 INR has depreciated in value in current terms.

Accounting Standard

This depreciation or loss in foreign currency, in accounting parlance, is handled with "foreign currency retranslation" on the date of accounting. It is basically adding some synthetic transactions to show capital gains or losses.

The process follows:

1. Transfer of the foreign currency holding to native currency at previous known rate.
2. Adjustment of capital gains in native currency, by addition or deduction.
3. Retransfer to foreign currency holding at current market rate.

To achieve the same we can get rid of steps 1 and 3, and only add/deduct capital gains as per Step 2.

Challenges

Net worth already reflects the newest valuation, through summation of all account balances at current exchange rates. And changes as per DEA would further aggravate the gain or the loss.

Solution

We have a hidden account called "Forex Retranslation", it is treated as an asset. It is hidden so that it can be used to attribute entries adjusting the capital gains, and at the same time excluding it from calculation of Net Worth.

Whenever there is a disparity in net worth calculation via account balances vs net worth calculation via entries, a small alert would be shown to the user. On clicking the same, the user shall learn that an unrealised capital gains/loss is pending for accounting.

Upon confirming the same the app shall automatically adjust the disparity.

capital_gains => forex_adjustment