Example of Foreign Currency Adjustments During Reclassification

In this example, 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 accounting preference Exclude Contract Assets from FX Reclassification box is checked. Therefore, reclassification generates only foreign currency adjustments related to recognized and planned revenue amounts that have been billed. Deferred revenue balances may remain after all revenue is recognized.

For an example with both foreign currency adjustments, see Example of Foreign Currency Gain or Loss on Contract Assets.

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 on the arrangement date and ending March 31. 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. The accounting preference Exclude Contract Assets from FX Reclassification box is checked. Thus, although an unbilled receivable adjustment is posted, a foreign currency gain or loss on contract asset adjustment is not created. Since no billing has occurred, there is no billing exchange rate, and no foreign currency adjustment is created. For information about unbilled receivable adjustments, see Unbilled Receivable Adjustment.

January Month-End Summary and Balances

The following table shows the month-end summary and balances for all the accounts.

January 31
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Income 1		22.00	0	–22.00
Income 2		44.00	0	–44.00
Income 3		33.00	0	–33.00
Income 4		55.00	0	–55.00
Deferred Revenue 1	22.00	22.00	0	0.00
Deferred Revenue 2	44.00	44.00	0	0.00
Deferred Revenue 3	33.00	33.00	0	0.00
Deferred Revenue 4	55.00	55.00	0	0.00
Unbilled Receivable	154.00		0	154.00

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 true, no foreign currency gain or loss on contract asset was recognized in the prior period. If the gain or loss on the contract asset had been recognized, the amounts would have been added to the base cumulative revenue recognized. Consequently, the effective revenue recognition exchange rate would have been different.

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	$36	1.1	1.2	30 × (1.2 – 1.1) = $3.00
Item B	€80	€50	€50	$88	$60	1.1	1.2	50 × (1.2 – 1.1) = $5.00
Item C	€60	€60	€60	$66	$72	1.1	1.2	60 × (1.2 – 1.1) = $6.00
Item D	€100	€25	€25	$110	$30	1.1	1.2	25 × (1.2 – 1.1) = $2.50
Total	€280	€165		$308	$198			$16.50

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

February Month-End Summary and Balances

The following tables show the month-end summary and balances for all the accounts.

February 1
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Accounts Receivable	198.00		0.00	198.00
Deferred Revenue 1		36.00	0.00	–36.00
Deferred Revenue 2		60.00	0.00	–60.00
Deferred Revenue 3		72.00	0.00	–72.00
Deferred Revenue 4		30.00	0.00	–30.00

February 28
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Deferred Revenue 1	22.00		–36.00	–14.00
Deferred Revenue 2	44.00		–60.00	–16.00
Deferred Revenue 3	33.00		–72.00	–39.00
Deferred Revenue 4	55.00		–30.00	25.00
Income 1		22.00	–22.00	–44.00
Income 2		44.00	–44.00	–88.00
Income 3		33.00	–33.00	–66.00
Income 4		55.00	–55.00	–110.00

February 28
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Deferred Revenue 1	3.00		–14.00	–11.00
Deferred Revenue 2	5.00		–16.00	–11.00
Deferred Revenue 3	6.00		–39.00	–33.00
Deferred Revenue 4	2.50		25.00	27.50
Income 1		3.00	–44.00	–47.00
Income 2		5.00	–88.00	–93.00
Income 3		6.00	–66.00	–72.00
Income 4		2.50	–110.00	–112.50

February 28
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Deferred Revenue 1	22.00		–11.00	11.00
Deferred Revenue 2	44.00		–11.00	33.00
Deferred Revenue 3	33.00		–33.00	0.00
Deferred Revenue 4	55.00		27.50	82.50
Unbilled Receivable		154.00	154.00	0.00

February 28
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Unbilled Receivable	126.50		0.00	126.50
Deferred Revenue 1		11.00	11.00	0.00
Deferred Revenue 2		33.00	33.00	0.00
Deferred Revenue 3		0.00	0.00	0.00
Deferred Revenue 4		82.50	82.50	0.00

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 true, no foreign currency gain or loss on contract asset was recognized in the prior period. If the gain or loss on the contract asset had been recognized, the amounts would have been added to the base cumulative revenue recognized. Consequently, the effective revenue recognition exchange rate would have been different.

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	Cumulative Gain/(Loss)	Foreign Currency Adjustment
Item A	€60	€60	€60	$66	$73.50	1.1	1.225	60 × (1.225 – 1.1) = $7.50	7.50 – 3.00= $4.50
Item B	€120	€120	€120	$132	$147.50	1.1	1.22917	120 × (1.22917 – 1.1) = $15.50	15.50 – 5.00 = $10.50
Item C	€90	€90	€90	$99	$109.50	1.1	1.21667	90 × (1.21667 – 1.1) = $10.50	10.50 – 6.00 = $4.50
Item D	€150	€150	€150	$165	$186.25	1.1	1.24167	150 × (1.24167 – 1.1) = $21.25	21.25 – 2.50 = $18.75
Total	€420	€420		$462	$516.75				$38.25

The other reclassification journal entry at the end of March is the reversal of the prior period unbilled receivable.

March Month-End Summary and Balances

The following tables show the month-end summary and balances for all the accounts.

March 1
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Accounts Receivable	318.75		198.00	516.75
Deferred Revenue 1		37.50	—	–37.50
Deferred Revenue 2		87.50	—	–87.50
Deferred Revenue 3		37.50	—	–37.50
Deferred Revenue 4		156.25	—	–156.25

March 31
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Deferred Revenue 1	22.00		–37.50	–15.50
Deferred Revenue 2	44.00		–87.50	–43.50
Deferred Revenue 3	33.00		–37.50	–4.50
Deferred Revenue 4	55.00		–156.25	–101.25
Income 1		22.00	–47.00	–69.00
Income 2		44.00	–93.00	–137.00
Income 3		33.00	–72.00	–105.00
Income 4		55.00	–112.50	–167.50

March 31
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Deferred Revenue 1	4.50		–15.50	–11.00
Deferred Revenue 2	10.50		–43.50	–33.00
Deferred Revenue 3	4.50		–4.50	0.00
Deferred Revenue 4	18.75		–101.25	–82.50
Income 1		4.50	–69.00	–73.50
Income 2		10.50	–137.00	–147.50
Income 3		4.50	–105.00	–109.50
Income 4		18.75	–167.50	–186.25

March 31
Account	Debit (Base)	Credit (Base)	Starting Balance	Ending Balance
Deferred Revenue 1	11.00		–11.00	0.00
Deferred Revenue 2	33.00		–33.00	0.00
Deferred Revenue 3	0.00		0.00	0.00
Deferred Revenue 4	82.50		–82.50	0.00
Unbilled Receivable		126.50	126.50	0.00

Related Topics

Foreign Currency Adjustment

Example of Foreign Currency and Unbilled Receivable Adjustments Prospective Merge After Partial Billing

General Notices