The goods have reached the warehouse, but the riyal amount needed to pay the supplier changes before settlement. Should the units on the shelf be repriced whenever the exchange rate moves? In an ordinary credit purchase, inventory cost and the supplier payable do not move in the same way. Following one transaction makes the distinction clearer.
Assume a Saudi business with the riyal as its functional currency buys 500 units on credit for EUR 10,000. All exchange rates below are illustrative, not historical quotations. The goods and payable are recognised on the same date, inventory is carried at historical cost, and there are no advance payments, hedges or special financing arrangements. Freight, duties and taxes are excluded to isolate the currency movements.
Initial recognition: SAR 40,000
At a transaction-date rate of SAR 4 per euro, the purchase amounts to SAR 40,000. Debit inventory and credit the supplier payable by that amount. The illustrative unit cost is SAR 80. The supplier record must also retain the original EUR 10,000 because that is the foreign-currency amount requiring settlement.
An invoice date does not automatically establish the recognition date. Check when the conditions for recognising the asset and liability are met under the contract and supporting documents. Invoices can arrive before or after the goods. Preserve the exchange rate, quotation direction, source and date: recording “4” without specifying riyals per euro can cause a substantial error if an inverse quotation is used.
Period-end: the payable becomes SAR 41,000
The supplier remains unpaid at the reporting date and the closing rate is SAR 4.10 per euro. The outstanding monetary liability translates to SAR 41,000. In this ordinary case, the SAR 1,000 difference is an exchange loss: debit exchange losses and credit the supplier payable. It is not automatically added to the inventory units.
The inventory's historical cost basis remains SAR 40,000 before sales, write-downs or other costs requiring separate treatment. Do not raise unit cost to SAR 82 merely because the payable was retranslated. Inventory impairment is a separate question; retaining the historical exchange rate in this example does not remove the need to apply the relevant inventory measurement requirements.
Settlement: why is there a SAR 500 gain?
In the following period the business settles EUR 10,000 at an actual rate of SAR 4.05, paying SAR 40,500, with no separate bank fee in this example. Against a recorded liability of SAR 41,000, this produces a SAR 500 exchange gain. Debit the supplier payable SAR 41,000, credit the bank SAR 40,500, and credit exchange gains SAR 500.
Across the transaction, the net exchange loss is SAR 500: a SAR 1,000 loss at period-end followed by a SAR 500 gain on settlement. Do not add another SAR 500 loss while retaining the previous closing adjustment unchanged. That would double-count the effect. Compare settlement with the current carrying amount, taking account of any reversal process the accounting system uses for retranslation entries.
If the bank charges a separate fee, distinguish it from the exchange-rate difference and account for it using its supporting document. If only part of the invoice is paid, identify the euro amount settled and leave the remainder open for appropriate retranslation. A zero riyal balance alone is not enough to demonstrate settlement if foreign-currency units remain outstanding.
Before approving the allocation, match the invoice, currency, transferred amount, bank reference and residual balance. Review the supplier account in both currencies rather than relying on its riyal total. Treasury may prepare a scenario for the eventual settlement rate, but a forecast does not change the original recognition rate or remove the closing adjustment.
The distinction follows IAS 21's treatment of monetary and non-monetary items. Advance consideration, hedging derivatives or a different functional currency require separate analysis. Do not extend these illustrative entries to such arrangements without reviewing the facts and applicable requirements.
Sources & further reading
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General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
