To reduce its exposure to foreign exchange risk the business enters into a 60 day foreign exchange forward contract. The initial posting is to record the sale to the customer in the usual manner. The customer is expected to settle the account in 60 days on 30 January 2019. At the date of the sale the EUR/USD spot rate was 1.23 and when converted to USD the export sale is worth USD 123,000 (EUR 100,000 x 1.23). The business makes a sale to the customer for the amount 100,000 Euros on December 2, 2018. Sale and Foreign Exchange Forward Contract Date The settlement date when the customer makes payment in Euros and the foreign exchange forward contract must be settled.
The balance sheet date when the value for the accounts receivable and forward contract liability needs to be restated. The sale date when the product is sold to the customer and the foreign exchange forward contract is entered into. The business seeks to minimize its foreign currency exposure by entering into a foreign exchange forward contract.Īccounting for the transaction needs to be considered at three different dates. Since the customer will pay in Euros the business is subject to the risks resulting from fluctuations in the EUR/USD exchange rate. Suppose a business operating and reporting in US Dollars makes a sale to a customer in Europe for 100,000 Euros. Foreign Exchange Forward Contract Example In the case of a business receiving payment in a foreign currency the foreign exchange forward contract should be an agreement under which the business agrees to sell the foreign currency in return for a fixed amount of its own currency.īy entering into such a contract any fall in value of the customer receipt due to exchange rate changes is compensated by an increase in value of the foreign currency forward contract. The basic concept of a foreign exchange forward contract is that its value should move in the opposite direction to the value of the expected receipt from the customer. A foreign exchange forward contract can be used by a business to reduce its risk to foreign currency losses when it exports goods to overseas customers and receives payment in the customers currency.
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