A foreign-currency purchase has at least two moments where an exchange rate exists: the day the invoice is raised and the day the money leaves. If the rate moved between them, the two figures differ, and importers routinely record whichever one is more convenient. That creates a gap between the cost in your books and the cash that left the bank.
- The purchase is recorded at the rate on the transaction date.
- The cash movement is recorded at the rate actually obtained on the payment date.
- The difference between them is an exchange gain or loss, not a change in the cost of goods.
- Treating the two as one number hides the currency exposure entirely.
- The rate you actually got is the one on the remittance advice, not the market mid.
Two dates, two different questions
The two dates answer different questions, which is why they are not interchangeable. The transaction date answers what the goods cost you. The payment date answers what the transfer cost you. For a business reporting under IFRS this is not a matter of preference. IAS 21 paragraph 21 requires a foreign currency transaction to be recorded, on initial recognition, at the spot rate at the date of the transaction. Paragraph 23(a) requires monetary items still outstanding at the end of a reporting period to be translated at the closing rate. Paragraph 28 requires the exchange differences that result to be recognised in profit or loss in the period in which they arise.
| Date | What it records | Rate to use |
|---|---|---|
| Transaction date | The cost of the goods and the liability owed | The rate on the day the obligation arose |
| Payment date | The cash that left your account | The rate you were actually given |
| Period end, if you have not yet paid | The liability still outstanding | The closing rate on that date |
Where a reporting period ends before you have paid, the outstanding liability is normally restated, which produces a third figure. That is not an error; it is the exposure becoming visible before it is settled.
Why the difference is worth keeping separate
Folding the movement into the cost of the goods makes two very different things look like one. Your margin on a product then appears to change because of a currency movement, and you cannot tell whether a bad month was a pricing problem or a rate problem.
- Cost of goods should reflect what you agreed to buy.
- Exchange differences should reflect what the currency did while you owed the money.
- Kept apart, both are readable; combined, neither is.
Use the rate you got, not the rate you read
A published mid-market rate is a reference, not a price. Nobody transacts at it. The figure that belongs in your records is the one applied to your own payment, which appears on the remittance advice or payment confirmation.
- 1Take the rate from the payment confirmation, not from a rate website.
- 2File the confirmation with the invoice so the pair can be reconciled later.
- 3Record the two figures separately rather than netting them off.
- 4Review the differences over a quarter, not per order, where the pattern is visible.
What this looks like across a year
For an importer placing orders monthly, the individual differences are small and the annual total is not. Kept as its own line, that total is a number you can act on: it is the price of the gap between agreeing an order and paying for it.
- A consistently negative total suggests you are paying later than you price.
- A volatile total suggests order sizes are large relative to how often you buy.
- A total near zero suggests the gap is short enough not to matter.
None of those readings is available if the differences were buried in cost of sales. Separating them costs nothing and turns an invisible exposure into a managed one.
Frequently asked questions
Can I just use the rate on the payment date for everything?
It is simpler, and it removes the exchange difference from view by treating the goods as having cost whatever the currency happened to do. Under IFRS the shortcut is not available: IAS 21 paragraph 21 fixes the recorded cost at the transaction-date rate, and paragraph 28 sends the difference arising on settlement to profit or loss rather than into the cost of the goods.
What if I pay a deposit and a balance on different dates?
Each cash movement is recorded at its own rate. The liability arose once, so the cost of goods is set once, and each settlement produces its own difference.
Where do I find the rate I actually received?
On the payment confirmation or remittance advice issued when the transfer was made. It shows the amount debited in your currency and the amount sent in the supplier currency.
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