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Lesson 16, Topic 1

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✏️+🎥Foreign Currency Transactions🟢

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Simon Masih 13 February 2024

Hello Sir,
Lesson 4 topic 15. video time 28:22 minutes. video shows that foreign currency transactions should go under net income. Isn’t it supposed to be a part of comprehensive income?

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1. Deleted User 16 February 2024
  
  Hello Simon,
  
  Yes, foreign currency gains and losses are included in the net income which is part of comprehensive income.
  
  Farhat Lectures Support Team
  
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Akshat Singh 26 February 2024

Hello sir,
Could you please explain how we record foreign currency transaction Gain or loss in net income
Shouldn’t it be a part of OCI

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1. Deleted User 2 March 2024
  
  Hello Akshat,
  
  Under US Generally Accepted Accounting Principles (GAAP), foreign currency transaction gains or losses are generally recorded in the income statement. However, there are specific circumstances where they may be recorded in other comprehensive income (OCI).
  
  Foreign Currency Transactions:
  
  When a company conducts transactions denominated in a foreign currency, any exchange rate changes between the transaction date and settlement date result in foreign currency transaction gains or losses.
  These gains or losses are typically recognized in the income statement as part of net income. They are reported in the period in which the exchange rate changes occur.
  
  Translation of Financial Statements:
  
  When a company has foreign subsidiaries or foreign operations, it often translates the financial statements of those entities into the reporting currency of the parent company.
  The resulting translation adjustments, which arise due to changes in exchange rates, are typically recorded in OCI rather than the income statement. This is because these translation adjustments are considered part of the overall cumulative translation adjustment and are not realized until the foreign entity is sold or otherwise disposed of.
  
  Farhat Lectures Support Team
  
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  1. K C 20 April 2024
    
    Dear Mr. Alex, I have a query on the “Foreign Currency Transaction” paragraph in your response above. It is noted that, Realized gains or losses would form a part of Income i.e., arising from settlement of transactions. However, where would the Unrealized gains or losses be recorded ? Is it in the Income statement or in the OCI ?
    
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    1. Maroun, CPA 19 June 2024
      
      Hello K C,
      
      Unrealized gains or losses from foreign currency transactions are reported on the income statement.
      
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  2. Kantesh Rathaur 18 June 2024
    
    Sir, thanks a lot for your explanation.
    
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Amer Shareef 3 August 2024

So if any realized gains and losses in foreign exchange should be reported as part of or in net income and any unrealized gains and losses in foreign exchange should be reported as part of OCI?

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1. Maroun, CPA 5 August 2024
  
  Hello Amer,
  
  When a company conducts transactions denominated in a foreign currency (such as credit sales or purchases), any exchange rate changes between the transaction date and settlement date result in foreign currency transaction gains or losses, that are recognized in the income statement as part of net income. Therefore, both unrealized and realized gains or losses from
  foreign currency transactions (such as receivables, payables, and other monetary items) are recognized in the income statement.
  
  For foreign operations (such as subsidiaries with a functional currency different from the parent company’s reporting currency), unrealized gains and losses from translating the financial statements of the foreign operation into the reporting currency are reported in other comprehensive income (OCI).
  When the foreign operation is disposed of, the cumulative translation adjustment is reclassified from OCI to net income.
  
  I hope this helps!
  
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Samanyu Sreeram 17 December 2024

Hi, this is with reference to the gain recorded at 21:58. In discontinued operations, Gains towards an impaired asset is limited by the impairment loss previously recorded. I just wanted to know if there are any provisions governing the same with regards to items in OCI.

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1. Samanyu Sreeram 17 December 2024
  
  With reference to the query, I’d also like to ask if there’s any provision limiting gains during foreign currency transactions as well
  
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  1. Maroun, CPA 20 December 2024
    
    Hi Samanyu,
    
    You are correct that gains on an impaired asset in discontinued operations are typically limited to the amount of the previously recorded impairment loss. This ensures that the carrying value of the asset does not exceed what it would have been if no impairment had occurred. For items in OCI, the treatment depends on the nature of the OCI component. You can refer to the OCI lectures to learn the rules.
    
    For foreign currency transactions, there isn’t a limitation on gains in the same way as impairment recovery limits.
    
    I hope this helps!
    
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Cheryl Orticke 20 January 2025

Hello,
Hope all is well.
Can you provide additional details to determine the difference between direct and indirect for foreign currency? I am unable to decipher the difference. Thanks for your help.

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1. Maroun, CPA 21 January 2025
  
  Hello Cheryl,
  
  Let’s break this down so the difference between the direct and indirect methods for foreign currency exchange becomes clear.
  
  1. Direct Method:
  – Definition: The direct method expresses the foreign currency in terms of how much domestic currency (e.g., USD) is needed to buy 1 unit of the foreign currency.
  – Focus: “How much of my domestic currency equals 1 foreign unit?”
  Example (USD to EUR):
  If the exchange rate is 1 EUR = 1.20 USD, this is the direct quote for the USD.
  It tells you how many USD you need to buy 1 EUR.
  
  2. Indirect Method:
  – Definition: The indirect method expresses the foreign currency in terms of how much foreign currency you can obtain for 1 unit of the domestic currency.
  – Focus: “How much of the foreign currency equals 1 unit of my domestic currency?”
  Example (USD to EUR):
  If the exchange rate is 1 USD = 0.8333 EUR, this is the indirect quote for the USD.
  It tells you how many EUR you can get for 1 USD.
  
  How to Remember:
  Direct → “Domestic currency for 1 unit of foreign currency.”
  Indirect → “Foreign currency for 1 unit of domestic currency.”
  
  I hope this helps!
  
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abhishek shetty 26 January 2025

Hi Sir, Can you please help me to understand the use case below.

If the company is following calendar year as financial year, will company report 2,000 gain in income statement in current year and 2,350 loss in income statement in subsequent year as actual payment happened on 10th Jan.

Will it not create an inconsistency in financial reporting as we will end up reporting 2,000 gain without actual cash settlement in one year and 2,350 loss in another year financial statement?

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1. Maroun, CPA 29 January 2025
  
  Hi Abhishek,
  
  Great question! Accounting standards require recognizing gains and losses when they are realized or realizable, which is why the gain appears in one period and the loss in another. If the company follows a calendar year as its financial year, it would report the $2,000 gain in the current year’s income statement based on fair value adjustments or mark-to-market valuation. Then, in the subsequent year, when the actual payment occurs, the company would recognize a loss in that period’s income statement due to fluctuations occurring after the balance sheet date.
  
  While this might seem inconsistent, it actually reflects the economic reality of the transaction. Financial statements aim to present a fair and accurate view of the company’s financial position at each reporting date, even if cash settlement happens later at a different amount.
  
  This treatment is different than contingent liability because contingent liabilities are potential obligations that depend on a future event that is uncertain. Fair value changes relate to existing obligations, while contingent liabilities are potential future obligations that depend on uncertain events and are only recorded when probable and estimable.
  
  I hope this helps!
  
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Humayun Rashid 2 July 2025

The country name is Colombia, not Columbia. Columbia is a university.

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1. Maroun, CPA 4 July 2025
  
  Hello Humayun,
  
  I’ve corrected the typo in the PPT and video.
  Thank you for bringing this to our attention!
  
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Joseph Aiello 22 July 2025

I can open or download the slides

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1. Maroun, CPA 25 July 2025
  
  Hello Joseph,
  
  I’ve updated the PPT.
  Please try downloading it again and let me know if the issue persists.
  
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Joseph Aiello 22 July 2025

I cannot open or download the slides for this topic. It brings me to an error page when i click the link and when i click download it tells me there is no file to download.

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1. Maroun, CPA 25 July 2025
  
  Hello Joseph,
  
  I’ve updated the PPT.
  Please try downloading it again and let me know if the issue persists.
  
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darren anderson 27 July 2025

At 24:26 Farhat calculates 1/.0391=10.98
I have 1/.0391=25.58

Where is the disconnect?

Thank You!

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1. Maroun, CPA 29 July 2025
  
  Hello Darren,
  
  You’re correct, the disconnect happened because Professor Farhat mistakenly missed typing the digit “3,” dividing by 0.091 instead of correctly dividing by 0.0391. The accurate calculation should indeed be:
  1 / 0.0391 = 25.58
  
  Thank you for pointing out this error! We will update the lecture
  
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Abdulaziz Almojil 28 July 2025

At 24:17 you divide 1 over 0.091 and it should be over 0.0391 and the result is 25.6 approx.

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1. Maroun, CPA 31 July 2025
  
  Hello Abdulaziz,
  
  You’re correct! The accurate calculation should indeed be:
  1 / 0.0391 = 25.58
  
  Thank you for pointing out this error! We will update the lecture
  
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Medhat 24 December 2025

On September 22, Year 4, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency. On that date, the spot rate was $0.55. Yumi paid the bill in full on March 20, Year 5, when the spot rate was $0.65. The spot rate was $0.70 on December 31, Year 4. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, Year 4?

A.Option A. $1,000

B.Option B. $1,500

C.Option C. $500

D.Option D. $0

From my understanding, at the end of Year 4, there is an unrealized loss of $1,500. This loss is not reported in the income statement because it is unrealized. Instead, it is recorded as part of Other Comprehensive Income (OCI). Therefore, it does not affect the net income but will be reflected in accumulated OCI within equity on the balance sheet.so choice D is $0. am i correct?

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1. Maroun, CPA 26 December 2025
  
  Hello Medhat,
  
  Your logic regarding “unrealized” gains and losses typically flowing to Other Comprehensive Income (OCI) is correct for certain items like Available-for-Sale debt securities, but foreign currency transactions follow a different rule under US GAAP (ASC 830).
  
  Gains or losses resulting from foreign currency transactions (such as buying or selling goods denominated in a foreign currency) must be recognized in Net Income in the period the exchange rate changes, even if the transaction has not yet been settled. The accounting standards require us to adjust the recorded payable to the current spot rate at each balance sheet date to reflect the actual amount of cash we would need to pay if we settled the debt today.
  
  In this scenario, Yumi Corp. has a liability that increased from $5,500 (10,000 units × $0.55) on the purchase date to $7,000 (10,000 units × $0.70) on December 31. Because the company now owes more US dollars to settle the same debt, they have incurred a $1,500 loss. This transaction loss is reported immediately on the income statement for Year 4, making Option B ($1,500) the correct answer.
  
  The OCI treatment you are thinking of generally applies to foreign currency translation adjustments, which occur when converting a foreign subsidiary’s entire financial statements into the parent’s reporting currency, rather than individual transactions like this one.
  
  Hope this helps!
  
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Jack Kourie 3 January 2026

In the example at the end of the video, the example asks for the year-end FC gain or loss. However, the payable seems to have been settled on December 30, so why would we consider the exchange rate on December 31 to calculate the loss?
Shouldn’t the answer be $1,200 loss?
I might have misunderstood the explanation of the correct answer, but I don’t think there is an unrealized loss here as the payable was settled before year-end.

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1. Maroun, CPA 6 January 2026
  
  Hello Jack,
  
  You’re thinking about this correctly. If the receivable was actually settled on December 30 (before the 12/31 year-end), then there is no receivable outstanding at 12/31, so we would not remeasure using the 12/31 exchange rate. In that case, the company recognizes only the realized foreign currency loss at settlement:
  
  Recorded A/R at sale (11/1):
  120,000 × 0.75 = $90,000
  
  Cash collected at settlement (12/30):
  120,000 × 0.74 = $88,800
  
  Thus, the loss is:
  $90,000 − $88,800 = $1,200 loss.
  
  The 12/31 rate (0.72) would only matter if the receivable were still outstanding at 12/31 (i.e., if settlement happened after year-end).
  
  We will update the question. Thank you for bringing this to our attention!
  
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  1. Amaka Ekeyi 21 May 2026
    
    Dear Maroun,
    
    Just to be sure I understood correctly, it then means that $1,200 (loss) is actually the correct answer right?
    
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    1. Maroun, CPA 23 May 2026
      
      Hello Amaka,
      
      Yes, you understood it correctly.
      
      Since the receivable was settled on December 30, there is no balance remaining at year-end, so we do not use the December 31 exchange rate.
      
      Therefore, the only loss recognized is the realized loss at settlement, which is $1,200.
      
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Kunal Vekaria 27 August 2026

Should’ve this video be in front of the CPA exam question video? The sequence seems incorrect.

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1. Maroun, CPA 29 August 2026
  
  Hello Kunal,
  
  I’ve corrected the order of the videos.
  Thank you for bringing this to our attention!
  
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