Wednesday, 20 January 2016

How To Interpret Foreign Exchange Gain/Loss in Financial Report?

If you wish to know the answer for this question, then I'm sorry because I am also looking for it.

We know that when MYR value drops, exporters that sell their products or services in foreign currencies will get a profit boost.

However, if the raw material cost are denominated in foreign currencies and it makes up a big portion of its overall cost, then weakening MYR might not give too significant increase in profit.

If the export company has lots of debts/borrowings denominated in foreign currencies, then weakening of MYR might not be good for them.

In a company's quarterly financial report, it will show how its profit before tax are arrived at, either below the income statement or in the explanatory notes.

This section will usually include some realized/unrealized foreign exchange gain/loss.

For example, in Latitude latest FY16Q1 quarterly report:

It shows that in FY16Q1, Latitude has a net forex gain of RM7.829mil, and these are already included in arriving at the net profit.

(1) What does this foreign exchange gain made up of?

I'm actually not sure and hope that someone with accounting knowledge can help to explain.

From my guess, this forex gain/loss should be from its receivables/payables, cash/debts denominated in foreign currencies and perhaps other items in the balance sheet.

For example, company Z exports its products in USD.

Lets say credit sales of USD100k is made at exchange rate of RM3.50 in early Q1. This means that a revenue of RM350k is registered and it will have USD100k as trade receivables.

In the middle of Q1, part of the bill USD40k (receivables) is settled at exchange rate of RM4.00. So there is a realized forex gain of 40k x RM0.50 = RM20k.

If other outstanding amount are not yet paid and MYR ends Q1 at RM4.30, then there will be an unrealized forex gain of 60k x RM0.80 = RM48k.

So the total forex gain for this particular sales is RM68k in Q1, which means that the company can potentially receive RM418k from a sales that worth RM350k.

The same should apply to payables in foreign currencies.

For borrowings, if a company secured USD100k borrowings at exchange rate of RM3.50, and it repaid USD30k at exchange rate of RM4.00, it will have a realized foreign exchange loss of RM15k.

If MYR ends the reporting quarter at RM4.30, then there will be an unrealized forex loss of RM56k.

Am I right?

However, (2) Which exchange rate is used as reference in the subsequent quarter? Is it the rate when sales are made, or the rate at end of previous quarter?

Lets use the company Z mentioned earlier as example.

Company Z makes USD100k sales in early Q1 at RM3.50 rate, and ends Q1 with USD60k receivables at RM4.30 rate. If the bill is settled fully in Q2 at exchange rate of RM4.10, will it register a realized forex gain of 60k x RM(4.10 - 3.50) = RM36k in Q2?

Or for Q2, we use the exchange rate at end of Q1 which is RM4.30 as a reference so company Z will register forex loss of 60k x RM(4.10 - 4.30) = -RM12k when the rate drops from RM4.30 to RM4.10?

Besides, there is another "foreign currency translation" profit in the income statement under "other comprehensive income".

For Latitude in the same quarter, the amount of foreign currency income is relatively huge at RM42.710mil in a single quarter.

(3) What does this foreign currency translation income made up of?

I think this should be for its foreign subsidiaries which is in Vietnam.

As Vietnam Dong also appreciates significantly against MYR, there will be forex gain but I'm not too sure how this number is derived from but it seems like it is from the increase in net assets of its foreign subsidiaries QoQ due to currency exchange rate changes.

From what I understand, this type of profit should not be included under profit attributable to shareholders but it should not be totally ignored so it is put under "other comprehensive income".

So, it will not contribute to the company's net profit and EPS.

Hopefully some expert will help to answer the questions marked in red above.


  1. Hi BD, I am not accountant either but I can share the info I found in Google and my own opinion :
    I) For Question 1, your understanding on forex gain/loss and the examples are same as mine. Other item I can think of that can contribute to forex gain/loss is interest to pay on foreign currency denominated bond.
    ii) For Question 2, my understanding is if sales was made in Q1 at 3.5 rate and end of Q1 rate is 4.30, there should be unrealised forex gain reported in Q1 report if payment is yet to make. If payment was made sometimes in Q2 when the rate is 4.10, then Q2 result should report realised forex loss using 4.30 rate - 4.10 rate calculation. In overall, there still a forex gain for this particular sales transaction.
    iii) For Question 3, Wikipedia explains comprehensive income as follows :
    "..Comprehensive income is the net income and other items that must bypass the income statement because they have not been realized, including items like an unrealised gain/loss from available for sales securities and gain/loss from foreign currency translation.."

    Since Accounting board requires multinational corporation to list all assets and liabilities in terms of its native currency (in this case is RM) and Vietnam Dong has appreciated against RM, we can see gain in foreign currency translation in Latitude's report. This gain is unrealised unless Latitude sells it's Vietnam operation at current exchange rate.

  2. By the way, O&G counters are getting cheaper.. I can't resist the attractive pricing and start to top up Coastal and accumulate SKPetro yesterday.. I think i may repeat my mistake of "buy too soon" plan is to add more whenever the stock price drops 10sen from this point.
    Assuming oil price can really drop to USD20 like Goldman sacs has predicted, the downside is not much but upside is larger..i think.

    What do you think ?

    1. I agree that the downside now is limited for O&G. People can wait for 2-3 years in new property investment, why not in stock market? May be in 2018 oil rebounded to strongly and cause the next economy crisis, haha.

      For Coastal, I will wait for its next Q report to see how much depreciation charge its new huge asset will bring. I wish I can find a small/mid cap O&G company.

    2. Thanks for sharing your opinion. Another small/mid cap O&G company I am eyeing and you may want to look into is Deleum.

    3. Thanks. Deleum is quite consistent.

  3. Well, as soon as the unrealized gain can last for one yr, it will become realized gain. Vice versa, unrealized loss can last for one yr, it will become realized loss.

    So, from quarter to quarter, unrealized gain or loss will not affect the free cash flow.

    For example, company A has a USD debt of 10m, and need to repay at one yr later.

    At the moment, ringgit depreciated 10%, thats mean the amount of USD debt has appreciated 10% to 11m,

    In income statement, company A has to provide a loss of 1m in that particular, but since the debt would be repayed after one yr, so company A no need to pay anything first, so it would not affect the cash flow.

    If the ringgit depreciation 10% last till the maturity of date of the debt, then A will hv to repay 11m instead of 10m, this will be deducted from the cash flow, but will not affect the income statement, since the extra 1m has been provided in the previous quarter

  4. 1. It is correct to say so. Foreign currency gain/loss in the profit before tax are the forex difference from cash, receivables and payables (those will be settled in cash subsequently). All other bs items don't give rise to forex gain loss.

    2. Our standards requires foreign currency transactions (buy/sale of goods in forex, settlement of liability) to be measured at the rate on the date of transaction. However, in practice, most people use prior month end rate as approximate. Auditor will do a retrospective test at the end to ensure that the rates used approximate the actual rates.

    Outstanding balances that are revalued/translate at quarters, the rate on the report date should be used. But for practical reason, an earlier date might be used

    3. Translation difference in the other comprehensive income is the forex diff from translating the Net asset of a foreign subs

    Bursadummy, this is my auditor friend answers. Should be useful for every readers.

    1. hissyu2, really appreciate your input. It's useful. Thanks.

  5. These websites are really needed, you can learn a lot. currency exchange online