**GAINS AND LOSSES ON FOREIGN CURRENCY RATE FLUCTUATIONS**

**Effective Fiscal 2019**

**GAINS AND LOSSES ON FOREIGN CURRENCY RATE FLUCTUATIONS**

**NON-MONETARY BUSINESS TRANSACTIONS**

**EFFECTIVE FISCAL YEAR 2019**

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**Prepared By:**

**GENERAL LEDGER AND ADVISORY BRANCH**

**FISCAL ACCOUNTING**

**BUREAU OF THE FISCAL SERVICE**

**U.S. DEPARTMENT OF THE TREASURY**

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**Background**

Throughout the year, Federal Program Agencies (FPAs) incur gains and losses on non-monetary business transactions based on the fluctuation of foreign currency exchange rates.  During the period of execution, gains and losses are incurred at the time of disbursement as these exchange rates move up/down.  

A gain is recognized when the exchange rate in the value of foreign currency decreases in relation to the equivalent value of the United States dollar (USD).  A loss is recognized when the exchange rate in the value of foreign currency increases in relation to the USD equivalent value. For accounting purposes, applicable gains and losses are realized at the time of disbursement.

Historically, USSGL guidance only addressed gains/losses from the revaluation of foreign currency at the end of accounting periods (when foreign currency is revalued at the going exchange rate) for monetary assets, such as cash and cash equivalent investments.   Specifically, USSGL Transaction Code D576 records a loss resulting from the revaluation of foreign currency in the Foreign Currency Account Symbol (X7000 series) at the end of an accounting period, while Transaction Code D578 records a corresponding gain.  However, there has been no transaction-level guidance to standardize the accounting treatment of gains and losses related to non-monetary assets, such as unpaid obligations, in the normal course of business.

Currently, FPAs utilize USSGL accounts 719000 and 729000 for recording these gains and losses.   However, the only foreign currency gains and losses recognized in the USSGL guidance are related to the revaluation of foreign currency investments (USSGL account 120000) in the Foreign Currency Account Symbol (X7000 series).  As currently written, the transactions associated with USSGL accounts 719000 and 729000 do not provide a standard means for recording gains and losses incurred on non-monetary transactions in the normal course of business.  New standardized Transaction Codes are needed to account for gains/losses on unpaid obligations from the revaluation of foreign currency if there is a change in the foreign currency exchange rate between the time the funds are obligated, and the time the funds are disbursed.  These TCs would be recorded immediately preceding the funds disbursement, rather than at the end of an accounting period.

This scenario applies to FPAs with Treasury Accounts Symbols (TASs) that receive budgetary resources through appropriations, and must absorb any gains/losses from currency fluctuations within the TAS.  FPAs with foreign currency fluctuation accounts that have legal authority to Transfer and Merge funding are addressed in a separate example and are **excluded** from this scenario. Those excluded TASs are:

· Peace Corp (011X0101)

· American Battle Monuments Commission (074X0101)

· Department of Defense (097X0801)

· Department of Defense (097X0803)

# New USSGL Transactions (Effective FY 2019)

**B450**	To record a gain on current year unpaid obligations due to fluctuation of foreign currency exchange rates on a non-monetary transaction, where excess obligations due to the rate variance are deobligated at the time of disbursement.

**Comment:** Also post, reverse to USSGL TC B134 for direct appropriations.  Post this transaction immediately preceding disbursement   

                    (USSGL TC B110).

**Budgetary Entry									Proprietary Entry**

Debit 490100 Delivered Orders – Obligations, Unpaid				Debit 211000 Accounts Payable

   Credit 445000 Unapportioned Authority						     Credit 719000 Other Gains

   Credit 451000 Apportionments

   Credit 461000 Allotments – Realized Resources   

***Justification****: This transaction code is necessary to standardize the accounting treatment for gains and losses related to foreign currency fluctuation of non-monetary assets in the normal course of business.  It should be recorded immediately preceding a fund disbursement, when the value of the foreign currency exchange rate decreases in relation to the US Dollar between the time the funds are obligated and the time the funds are disbursed.  Excess obligations need to be deobligated and a gain needs recognized.*

**B452**	To record a loss on current year unpaid obligations due to fluctuation of foreign currency exchange rates on non-monetary transaction, where additional US equivalent dollars are obligated to cover the rate variance at the time of disbursement.

**Comment:** Also post USSGL TC B134 for direct appropriations.  Post this transaction immediately preceding disbursement (USSGL TC 

                   B110).

**Budgetary Entry									Proprietary Entry**

Debit 461000 Allotments – Realized Resources					Debit 729000 Other Losses

   Credit 490100 Delivered Orders – Obligations, Unpaid				     Credit 211000 Accounts Payable

***Justification****: This transaction code is necessary to standardize the accounting treatment for gains and losses related to foreign currency fluctuation of non-monetary assets in the normal course of business.  It should be recorded immediately preceding a fund disbursement, when the value of the foreign currency exchange rate increases in relation to the US Dollar between the time the funds are obligated and the time the funds are disbursed.  Additional US Dollar funds need to be obligated to cover differences, and a loss needs recorded.*

**D618**	To record a gain on prior-year unpaid obligations due to fluctuation of foreign currency exchange rates on a non-monetary transaction, where excess obligations of a prior year are adjusted downward due to the rate variance at the time of disbursement.

**Comment:**Prior-year adjustments are used only in Year 2 or later. Record USSGL account 465000 if the authority has expired.  Also post 

                   reverse to USSGL TC B134 for direct appropriations.  Post this transaction immediately preceding disbursement (USSGL TC 

                   B110).

**Budgetary Entry**

Debit 497100 Downward Adjustments of Prior-Year Unpaid Delivered Orders – Obligations, Recoveries

     Credit 445000 Unapportioned Authority

     Credit 451000 Apportionments

     Credit 461000 Allotments – Realized Resources

     Credit 465000 Allotments – Expired Authority

**Proprietary Entry**

Debit 211000 Accounts Payable

     Credit 719000 Other Gains

***Justification:****This transaction code is necessary to standardize the accounting treatment for gains and losses related to foreign currency fluctuation of non-monetary assets in the normal course of business.  It should be recorded immediately preceding a fund disbursement, when the value of the foreign currency exchange rate decreases in relation to the US Dollar between the time the funds are obligated and the time the funds are disbursed.  Excess obligations need to be deobligated and a gain needs recognized.*

**D626** 	To record a loss on prior-year unpaid obligations due to fluctuation of foreign currency exchange rates on a non-monetary transaction, where excess obligations of a prior year are adjusted upward due to the rate variance at the time of disbursement.

**Comment:**Prior-year adjustments are used only in Year 2 or later. Record USSGL account 465000 if the authority has expired.  Also post 

                   USSGL TC B134 for direct appropriations. Post this transaction immediately preceding disbursement (USSGL TC B110).

**Budgetary Entry**

Debit 461000 Allotments – Realized Resources

Debit 465000 Allotments – Expired Authority

     Credit 498100 Upward Adjustments of Prior-Year Delivered Orders – Obligations, Unpaid

**Proprietary Entry**

Debit 729000 Other Losses

     Credit 211000 Accounts Payable

***Justification:****This transaction code is necessary to standardize the accounting treatment for gains and losses related to foreign currency fluctuation of non-monetary assets in the normal course of business.  It should be recorded immediately preceding a fund disbursement, when the value of the foreign currency exchange rate increases in relation to the US Dollar between the time the funds are obligated and the time the funds are disbursed.  Additional US Dollar funds need to be obligated to cover differences, and a loss needs recorded.*

# Listing of USSGL Accounts Used in This Scenario

# Scenario Assumptions

The following overall assumptions are applicable to both the gain and the loss scenarios reflected in the transactions below:

· In Year 1, the Federal Program Agency (FPA) entered into an agreement to purchase supplies from a foreign entity based on the foreign entity’s currency exchange rate for 900,000 Euros (EUR).

· Obligations are posted in the FPA’s accounting system at the value of the US Dollar (USD).

· At the time of agreement, the foreign currency exchange rate is **1 EUR = 1.12 USD.**

· In Year 1, the FPA obligated **$1,008,000** in appropriated funds, with a foreign currency exchange rate of 1.12 USD (900,000 EUR x 1.12).

· Unobligated funds remaining at the end of Year 1 expire as of September 30th.

· The FPA has Definite Budget Authority.

· Beginning Trial Balances are not applicable in these scenarios.

**Scenario 1 – Gain on Foreign Currency Fluctuation**

**Year 1**

**Illustrative Transactions**

In the following transactions, a FPA creates current-year orders without an advance with a foreign vendor, who uses Euros as currency.  The FPA must convert the value of US Dollar to the Euro.  When goods are delivered, the FPA records the delivery and accrues an accounts payable.  

Before the FPA can disburse a payment to the foreign vendor, it identifies that the foreign exchange rate has changed.  After the goods were obligated, the value of the US Dollar increases (and the exchange rate in the value of foreign currency decreases.)  Thus, the value of the goods at the time of obligation was higher than the value at the time of disbursement.  Excess obligations will need to be deobligated and a gain will need to be recognized.  Because the gain is recognized at the time of disbursement, this gain is also posted immediately preceding the disbursement.

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**Year 1 Pre-Closing Adjusted Trial Balance**

**Year 1 Closing Entries**

**Year 1 Post-Closing Adjusted Trial Balance**

**Financial Statements – Year 1**

**Year 2**

**Illustrative Transactions**

During Year 2, the FPA is ready to disburse funds to the foreign vendor for expenses incurred in Year 1.

Before the FPA disburses the payment to the foreign vendor, it identifies that the foreign exchange rate has changed from the time of obligation in Year 1.  After the goods were obligated with Year 1 Budgetary Authority, the value of the US Dollar increased (and the exchange rate in the value of foreign currency decreased.)  Thus, the value of the goods at the time of obligation was higher than the value at the time of disbursement.  Excess obligations will need to be deobligated, and a gain and downward adjustment will need to be recognized.  Because the gain is recognized at the time of disbursement, this gain and downward adjustment are posted immediately preceding the disbursement.

**Year 2 Pre-Closing Adjusted Trial Balances**

#### Year 2 Closing Entries

**Year 2 Post-Closing Adjusted Trial Balances**

**Financial Statements – Year 2**

**Reclassified Financial Statements**

**Scenario 2 – Loss on Foreign Currency Fluctuation**

#### Year 1

#### Illustrative Transactions

In the following transactions, a Federal Program Agency (FPA) creates current-year orders without an advance with a foreign vendor, who uses Euros as currency.  The FPA must convert the value of US Dollar to the Euro.  When goods are delivered, the FPA records the delivery and accrues an accounts payable.

Before the FPA can disburse a payment to the foreign vendor, it identifies that the foreign exchange rate has changed.  After the goods were obligated, the value of the US Dollar decreases (and the exchange rate in the value of foreign currency increases.)  Thus, the value of the goods at the time of obligation was lower than the value at the time of disbursement.  Additional US Dollar funds will need to be obligated to cover the difference, and a loss will need to be recognized.  Because the loss is recognized at the time of disbursement, this loss is also posted immediately preceding the disbursement.

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# Year 1 Pre-Closing Adjusted Trial Balance

**Year 1 Closing Entries**

**Year 1 Post-Closing Adjusted Trial Balance**

**Financial Statements – Year 1**

#### Year 2

**Illustrative Transactions**

During Year 2, the FPA is ready to disburse funds to the foreign vendor for expenses incurred in Year 1.

Before the FPA can disburse a payment to the foreign vendor, it identifies that the foreign exchange rate has changed from the time of obligation in Year 1.  After the goods were obligated with Year 1 Budgetary Authority, the value of the US Dollar decreased (and the exchange rate in the value of foreign currency increased.)  Thus, the value of the goods at the time of obligation was lower than the value at the time of disbursement.  Additional US Dollar funds will need to be obligated to cover the difference, and a loss and upward adjustment will need to be recognized.  Because the loss is recognized at the time of disbursement, this loss and upward adjustment are also posted immediately preceding the disbursement.

# Year 2 Pre-Closing Adjusted Trial Balances

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#### Year 2 Closing Entries

**Year 2 Post-Closing Adjusted Trial Balances**

# Financial Statements – Year 2

**Reclassified Financial Statements**

Page 2 of 61

**FY 2019**