Exchange gain

An exchange gain consists of an extraordinary income as a result of a movement in the exchange rate. This variable is relevant for those companies and individuals that carry out transactions in foreign currency.

Exchange gain

For example, suppose that a Spanish firm receives financing in dollars. If the euro increases in value against the US currency, the amount of the credit will be reduced by converting it to the European currency. Therefore, there is an exchange gain for the borrower. We will explain this better with an example in the following paragraphs.

A foreign exchange gain is the opposite of a foreign exchange loss.

Foreign exchange gain of a debtor

The foreign exchange gains of a debtor are generated when the exchange rate rises, being this expressed as the amount of foreign currency necessary to buy a unit of national currency.

Let’s analyze, for example, the case of Sofía Gutiérrez. Sofía took out a loan of US $ 100 in January. At that time, the exchange rate was US $ 1.05 per euro (your local currency). That is, the value of the debt was € 95.24 euros. Result we reached by performing the following operation: (100 / 1.05).

After a month, let’s imagine that the price of the euro rises to US $ 1.08. Consequently, the value of the loan will fall to € 92.59 (100 / 1.08), which represents an exchange gain that would be calculated as follows:

(100 / 1.05) – (100 / 1.08) = 95.24 – 92.59 = € 2.65

That same exchange gain for the debtor would represent an exchange loss for the creditor.

It should be noted that if we express the exchange rate as the amount of national currency necessary to compare a unit of foreign currency, what was previously explained happens the other way around. That is, it is when the exchange rate falls that the debtor makes a profit. We can demonstrate this by taking as a reference the data from the example presented above.

If 1 euro = US $ 1.05 then US $ 1 = € 0.9524
If 1 euro = US $ 1.08 then US $ 1 = € 0.9259

Assuming that the loan is US $ 100, when the exchange rate falls from € 0.9524 to € 0.9259, the value in euros of the credit is reduced:

100 x (0.9524-0.9259) = € 2.65.

Exchange gain on an account receivable

Foreign exchange gains can come from accounts receivable. This, when a company makes part of its sales in foreign currency.

For example, let’s look at the case of a French company that has closed a sale on credit on January 20 of a merchandise that it will send to the United States. The amount of the operation is US $ 100 and the exchange rate on that date is US $ 1.1 per euro. Then the transaction amount is calculated in local currency:

100 / 1.1 = € 90.91

Assuming that the Value Added Tax (VAT) is 18%, the following accounting entry would proceed:

Has to To have
Accounts receivable 107.27
Sales 90.91
VAT transferred

16.36

Then, on the pay day, March 30, the exchange rate falls to US $ 1.05 per euro. The value of the sale in the local currency has to be calculated again:

100 / 1.05 = € 95.24
Sale + VAT = 95.24 x (1.18) = € 112.38
VAT = € 17.14

Then, the following accounting entry is noted:

Has to To have
Cash / Banks 112.38
VAT transferred 16.36
Exchange profit or gain 4.33
VAT payable 17.14
Accounts receivable 107.27