I - Other operating Gains & Losses: General principles 

9. Foreign operational exchange gains and losses - realized & unrealized (R53800)

Content

= Gains and losses on exchange rate and currency conversion. This includes the exchange rate differences on raw materials purchases related to procurements. The latter are generated automatically by SAP.

The foreign exchange gains and losses - realized - are made up of exchange gains and losses realized on:

• the payment/collection of foreign-currency debts and receivables
• the repayment of foreign-currency loans and borrowings
• foreign-currency financial instruments (options, forward-based sale or purchase agreements and so on).

The foreign exchange gains and losses - unrealized - are made up of potential exchange gains and losses:

• arising from the revaluation of foreign-currency debts and receivables at the end of each accounting period
• resulting from the revaluation of foreign-currency loans and borrowings
• on foreign-currency financial instruments (options, forward-based sale or purchase agreements and so on), excluding foreign-currency hedges on operating transactions (in which case the change in fair value is recognized on the same line as the hedged transaction).

Do NOT include the exchange rate differences related to cash flow hedge operations (each subsidiary involved receives monthly from CICC the amounts to be recorded manually under this heading). The related accounts in the PF1 companies Corporate Chart of Accounts are 6559000000 and 7559000000 (Impact exchange rate hedging on turnover). These differences are reported under "R12900 - Other variable expenses on sales" within costs of sales.

Comments

• In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency are recognized at the rates of exchange prevailing at the dates of the transactions.
  At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the closing rate.
  Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the closing rate when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
• Exchange differences are recognized in profit or loss in the period in which they arise except when they arise on:
• foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings;
• transactions entered in order to hedge certain foreign currency risks.
  Gains and losses on the hedging instrument relating to the effective portion of the hedge accumulated in the foreign currency translation reserve are reclassified to profit or loss in the same way as exchange differences relating to the foreign operation.
• monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.
• For the purpose of presenting consolidated financial statements:
• assets and liabilities of the Group’s foreign operations are expressed in EUR closing rates.
• Income and expense items are translated at the average exchange rates for the period.
• Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate) under “currency translation differences”.
• Gains and losses on exchange rate are reported under this heading. CICC and the other financial entities are accredited to take foreign exchange exposure, reported under "R53820 - Foreign exchange gains and losses on financial items", when the exchange rate differences refer to borrowing charges, interest income on cash and on internal loans.

Classification of exchange gains or losses

• Difference between the exchange rate used for posting a receivable or a payable and the rate given by CICC at the time the receivable or payable is assigned to CICC: R53800
• Exchange gain or loss generated on hedge transactions qualifying as hedge: R12900 - Other variable expenses on sales
• Exchange gain or loss generated on hedge transactions qualifying as trade.: R53800
• Exchange gain or loss generated on “unjustified” exchange positions: R53800
• Exchange gain or loss generated by CICC finance: R53820 - Foreign exchange gains and losses on financial items

See examples.

Reas also the following: Exposure to exchange gains and losses.

Closing exchange rates

Basic principle

The official closing exchange rates (the rate for the last working day of the month and the average rate) are forwarded by CICC. They are set in accordance with the rules and based on the sources described below:

Month-end rate:

This is taken from the pages of national fixing rates for the last working day of the month in the Reuters system.

• The European Central Bank fixing rate (page ECB37) is the first choice.
• If there is no Brussels fixing rate, local fixing rates are used wherever possible.
• If no official rate is available, the average rate (buying/selling) against the US dollar at the time at which the rates are set (between 2 pm and 5 pm on Reuters) is used.

Where the use of specific rates is not imposed by local statutory constraints, branches and subsidiaries should apply the last working day's rate supplied by CICC to convert monetary assets and liabilities denominated in foreign currency into local currency, for both the local accounts and monthly reporting.

Average rate:

This is the arithmetic average of the daily rates for the accounting year in question. It is calculated from January or the first day for which a new currency is taken into account (past figures are not taken into account). Daily rates are obtained on the basis of the method described for month-end rates.

The average rates are used exclusively by GAR (Group Accounting & Reporting) for monthly closings within the reporting system in order to convert income, expenses and cash flow statements from branches and foreign subsidiaries into EUR.

Deviations

Where the use of specific rates is imposed by local statutory constraints, it is permissible to deviate from the basic principle. Such statutory rates must in all cases be justified and the source detailed.  The company concerned must submit the reasons for the deviation to GAR (Group Accounting & Reporting), who will inform CICC and the relevant departments.