# Foreign Currency Accounting and Exchange Differences Explained *When you import or export in a foreign currency, which exchange rate applies? And how do you treat the gain or loss when that rate moves?* > **In short:** Foreign currency accounting explained: record each transaction at the rate on its date, then measure exchange differences on settlement. With worked examples. - **URL:** https://www.snad.io/en/blog/muhasabat-aumlat-ajnabiya-furuq-sarf - **Arabic original:** https://www.snad.io/blog/muhasabat-aumlat-ajnabiya-furuq-sarf - **Category:** Guides — Core Accounting - **Tags:** foreign currency, exchange differences, exchange rate, imports, exports, accounting, financial statements - **Published:** 2026-06-17 - **Updated:** 2026-08-02 - **Publisher:** Snad (snad.io) Foreign currency accounting covers every transaction you handle in something other than SAR. The rule is to record the transaction at the exchange rate prevailing on the day it occurs. Exchange differences then arise as the rate moves — realized on actual settlement, and unrealized when outstanding balances are remeasured at the reporting date. SAR is the functional currency and the presentation currency for most Saudi businesses. Correct treatment separates your trading profit from the effect of currency movement. This guide explains it with examples for importers and exporters. ## Why foreign currency needs special treatment When you buy or sell in a currency other than SAR, **the exchange rate moves between the moment of the transaction and the moment of settlement**. That movement creates a gain or a loss with no connection to your core business. Ignoring it distorts your profit and hides a real exposure. Correct treatment separates **your trading profit** from **the effect of currency movement**, so you know where every SAR in your result came from. ## Functional currency and presentation currency Two concepts sit at the base of this: - **Functional currency**: the currency of the primary economic environment in which the entity operates. For most Saudi businesses that is SAR. - **Presentation currency**: the currency in which the financial statements are presented, usually SAR as well. Any transaction in another currency (the dollar, the euro, the yuan…) counts as a **foreign currency** transaction. It has to be translated into SAR under clear rules before it appears in your books. ## Recording the transaction at the rate on its date The first rule: a foreign currency transaction enters your books **at the exchange rate prevailing on the day it occurs**. - Imported goods for USD 10,000 when the rate that day was 3.75? You record SAR 37,500. - That amount is then fixed in the supplier's account in SAR. This initial recording rate is the reference against which exchange differences are measured later, whether on settlement or at period close. ## Realized and unrealized exchange differences The effect of a rate change splits into two types: - **Realized differences**: they arise on **actual settlement**, when the exchange rate differs from the rate on the recording date. They are booked as a gain or a loss in the income statement. - **Unrealized differences**: they arise at **period close**, on foreign currency balances that are still outstanding, from remeasuring those balances at the reporting date rate. Both land in the result, but the first is a real cash outcome and the second is a valuation that may reverse later. ## A worked example on an import invoice You imported for EUR 20,000 when the rate on the invoice date was 4.10, so the supplier was recorded at SAR 82,000. By the settlement date the rate had risen to 4.20: - Amount actually paid = 20,000 × 4.20 = **SAR 84,000**. - Exchange difference = 84,000 − 82,000 = **SAR 2,000 realized exchange loss**. This loss has nothing to do with the purchase price of the goods. It comes from the movement in the euro, so it is recorded separately as an exchange difference loss. ## Remeasuring balances at the reporting date At the end of the period, **foreign currency monetary items** (bank balances, and receivables and payables denominated in a foreign currency) are retranslated at the reporting date rate: - Work out the difference between their carrying amount and their value at the new rate. - Book that difference as an unrealized exchange gain or loss. Non-monetary items, such as inventory carried at cost, are normally not remeasured at the new rate. ## Common mistakes in foreign currency transactions The most frequent mistakes: - **Using a fixed exchange rate** for the whole year instead of the rate on the date of each transaction. - **Folding exchange differences into the cost of goods** instead of separating them as a standalone line. - **Skipping the remeasurement** of outstanding balances at the end of the period. - **Confusing realized differences with unrealized ones**. These mistakes distort the true profit margin and hide currency exposure from management. ## How Snad handles your foreign currency transactions In Snad you record the invoice in its own foreign currency along with its exchange rate. The system converts it to SAR automatically and tracks each supplier and customer balance in that currency. On settlement or at period close it **calculates realized and unrealized exchange differences and posts them to a separate line**, so your trading margin shows up clean and apart from the effect of currency movement. ## Frequently asked questions ### Which exchange rate do I use to record a foreign currency transaction? Record the transaction at the exchange rate prevailing on the day it occurs. That initial rate is the reference against which exchange differences are measured later, whether on settlement or at period close. ### What is the difference between realized and unrealized exchange differences? Realized differences arise on actual settlement, when the rate differs from the rate on the recording date. Unrealized differences arise at period close, from remeasuring outstanding foreign currency balances at the reporting date rate. ### What is the difference between functional currency and presentation currency? The functional currency is the currency of the entity's primary economic environment (SAR for most Saudi businesses). The presentation currency is the currency in which the financial statements are presented, usually SAR as well. ### Do I remeasure every balance at the end of the period? Only foreign currency monetary items are retranslated at the reporting date rate: bank balances, and receivables and payables denominated in a foreign currency. Non-monetary items such as inventory carried at cost are normally not remeasured. ### Where is an exchange difference loss recorded? In the income statement, as a standalone line (exchange difference gain or loss) kept separate from the cost of goods, because it results from currency movement rather than from your trading activity. ### Why should I separate exchange differences from purchase cost? Because folding them in distorts your true profit margin and hides currency exposure from management. Separating them shows your trading profit clean, with the effect of currency movement on its own. --- ## About the publisher **Snad (سند)** — a private Saudi software company based in Riyadh, founded 2025. Legal form: Sole proprietorship. Commercial registration: 7038154642 VAT number: 310959226500003 Only official domain: snad.io > Snad is a private commercial business-management platform. It is not a > government body, not a bank, and not a government services portal, and it > is not affiliated with any government entity. Any site or app with a > similar name is unrelated to Snad.