Example of Foreign Currency Gain or Loss on Contract Assets

This example uses the same scenario as in Example of Foreign Currency Adjustments During Reclassification. The difference is that the accounting preference Exclude Contract Asset from FX Reclassification box is clear. Thus, reclassification generates foreign currency adjustments for both recognized and planned revenue amounts that have been billed and for gain or loss on contract assets. Deferred revenue balances are zeroed out after all revenue is recognized.

The scenario is that a company with U.S. dollar (USD) as its base currency enters a contract with customer that does business in euros. The contract is in euros (EUR), the transaction (source or foreign) currency. Revenue recognition is spread evenly over 3 periods.

The details for the three periods are as follows:

January Activity
February Activity
March Activity

January Activity

On January 4, the following records are created in NetSuite:

A sales order with 4 item lines to represent the contract, which totals €420. The sales order uses a currency exchange rate of 1.10 to convert euros in the transaction to U.S. dollars in the general ledger. No discounts are applicable.
The system generates a revenue arrangement for the sales order with transaction total and total revenue of €420. The arrangement uses the sales price as the fair value, so the revenue amounts equal the discounted sales amounts from the source sales order. The currency exchange rate for the arrangement is the same as the sales order, 1.10.
On revenue arrangement creation, the system generates actual revenue plans for the revenue elements in the base currency (USD). All plans use the same revenue recognition rule with recognition spread evenly over 3 periods beginning with January and ending in March. The plan exchange rate of 1.10 is the same as the sales order and revenue arrangement.

Sales Order

Item	Quantity	Rate	Discounted Sales Amount
A	100	0.60	€60
B	12	10	120
C	45	2	90
D	6	25	150
Total			€420

Revenue Recognition Plans

Element	Revenue Amount (Source)	Plan Amount (Base)	Amount per Period (Base)	Amount per Period (Source)
Item A	€60	$66	$22	€20
Item B	€120	$132	$44	€40
Item C	€90	$99	$33	€30
Item D	€150	$165	$55	€50
Total	€420	$462	$154	€140

The company does not invoice the customer during January, but it does create revenue recognition journal entries to recognize revenue according to the plans.

When the company runs the reclassification process, the euro to dollar exchange rate is 1.2. Since no billing has occurred, there is no billing exchange rate, and no foreign currency adjustment is created. The accounting preference Exclude Contract Asset from FX Reclassification box is clear. Thus, after the unbilled receivable adjustment is posted, an adjustment is created for foreign currency gain or loss on contract asset.

January Foreign Currency Gain or Loss on Contract Asset

The following table shows the calculation for the adjustment for foreign currency gain or loss on contract asset. FX Rate in the table stands for currency exchange rate. In this example, the adjustment is a gain. The contract asset is recorded by the unbilled receivable adjustment. For information about this adjustment, see Unbilled Receivable Adjustment.

In January, Contract Asset (Source), shown in the table, is equal to Cumulative Rev Rec (Source), not shown. The revenue arrangement has no contract liability in this period, so that portion of the calculation for the foreign currency gain (loss) is omitted.

Element	Contract Asset (Source)	Cumulative Rev Rec (Base)	Effective Rev Rec FX Rate	Period End FX Rate	Foreign Currency Gain or Loss on Contract Asset
Item A	€20	$22	22 ÷ 20 = 1.1	1.2	20 × (1.2 – 1.1) = $2.00
Item B	€40	$44	44 ÷ 40 = 1.1	1.2	40 × (1.2 – 1.1) = $4.00
Item C	€30	$33	33 ÷ 30 = 1.1	1.2	30 × (1.2 – 1.1) = $3.00
Item D	€50	$55	55 ÷ 50 = 1.1	1.2	50 × (1.2 – 1.1) = $5
Total	€140	$154			$14

February Activity

On February 1, the company bills a portion of the sales order. The euro to dollar exchange rate on the invoice is 1.2. Because the fair values are the same as the sales prices for the revenue elements, the gross and effective cumulative billing amounts are the same.

February Invoice

Item	Quantity	Amount (Source)	Amount (Base)
A	50	€30	$36
B	5	€50	$60
C	30	€60	$72
D	1	€25	$30
Total		€165	$198

At the end of the period, the company creates journal entries to recognize revenue according to the revenue plans. Then it runs the reclassification process. The first reclassification journal entry is the foreign currency adjustment

February Foreign Currency Adjustment

Because Exclude Contract Asset from FX Reclassification is false, foreign currency gain or loss on contract assets was recognized in the prior period. Those amounts have been added to the Cumulative Rev Rec (Base) amounts to calculate the effective revenue recognition exchange rate.

The following table shows the calculation for the foreign currency adjustment. FX Rate stands for currency exchange rate. In this example, the adjustment is a gain.

Element	Cumulative Rev Rec (Source)	Effective Cumulative Billing (Source)	Overlap (Source)	Cumulative Rev Rec (Base)	Effective Cumulative Billing (Base)	Effective Rev Rec FX Rate	Effective Billing FX Rate	Foreign Currency Adjustment
Item A	€40	€30	€30	44 + 2 = $46	$36	46 ÷ 40 = 1.15	1.2	30 × (1.2 – 1.15) = $1.50
Item B	€80	€50	€50	88 + 4 = $92	$60	92 ÷ 80 = 1.15	1.2	50 × (1.2 – 1.15) = $2.50
Item C	€60	€60	€60	66 + 3 = $69	$72	69 ÷ 60 = 1.15	1.2	60 × (1.2 – 1.1) = $3.00
Item D	€100	€25	€25	110 + 5 = $115	$30	115 ÷ 100 = 1.15	1.2	25 × (1.2 – 1.15) = $1.25
Total	€280	€165		308 + 14 = $322	$198			$8.25

February Foreign Currency Gain or Loss on Contract Asset

The revenue arrangement has no contract liability in this period, so that portion of the calculation for the foreign currency gain (loss) is omitted.

Element	Contract Asset (Source)	Cumulative Rev Rec (Source)	Cumulative Rev Rec (Base)	Effective Rev Rec FX Rate	Period End FX Rate	Foreign Currency Gain or Loss on Contract Asset
Item A	€10	€40	44 + 2 = $46	46 ÷ 40 = 1.15	1.25	10 × (1.25 – 1.15) = $1.00
Item B	€30	€80	88 + 4 = $92	92 ÷ 80 = 1.15	1.25	30 × (1.25 – 1.15) = $3.00
Item C	—	€60	66 + 3 = $69	69 ÷ 60 = 1.15	1.25	—
Item D	€75	€100	110 + 5 = $115	115 ÷ 100 = 1.15	1.25	75 × (1.25 – 1.15) = $7.50
Total	€115	€280	308 + 14 = $322			$11.50

Other reclassification journal entries at the end of February are reversal of the prior period unbilled receivable and a new unbilled receivable adjustment.

March Activity

On March 1, the company bills the remaining portion of the sales order. The euro to dollar exchange rate on the invoice is 1.25. Because the fair values are the same as the sales prices for the revenue elements, the gross and effective cumulative billing amounts are the same.

March Invoice

Item	Quantity	Amount (Source)	Amount (Base)
A	50	€30	$37.50
B	7	€70	$87.50
C	15	€30	$37.50
D	5	€125	$156.25
Total		€255	$318.75

At the end of the period, the company creates journal entries to recognize the remaining revenue according to the revenue plans. Then it runs the reclassification process. The first reclassification journal entry is the foreign currency adjustment

March Foreign Currency Adjustment

Because Exclude Contract Asset from FX Reclassification is false, foreign currency gain or loss on contract assets was recognized in prior periods. Those amounts have been added to the Cumulative Rev Rec (Base) amounts to calculate the effective revenue recognition exchange rate.