Exchange Gains and Losses

Exchange gains and losses refer to the differences arising from the conversion of foreign currency business into the recording currency due to exchange rate fluctuations. Exchange gains and losses can be divided into realized exchange gains and losses and unrealized exchange gains and losses. Realized exchange gains and losses refer to the exchange gains and losses generated when foreign currency claims, debts or monetary funds are settled or exchanged. Unrealized exchange gains and losses refer to the exchange gains and losses generated by adjusting foreign currency claims, debts or monetary funds at the end of the accounting period based on the exchange rate at the end of the accounting period.

Factors Affecting Exchange Gains and Losses

Exchange Rate Changes

The exchange rate is the price ratio and exchange ratio between two different currencies. It is the price of one country's currency unit expressed in another country's currency unit. When the exchange rate changes, there will be differences when converting assets, liabilities, income and expenses denominated in foreign currencies into the recording currency, resulting in exchange gains and losses.

Selection of Accounting Exchange Rate

The accounting exchange rate is the exchange rate used when recording foreign currency transactions. According to "Accounting Standards for Business Enterprises" No. 19 - Accounting Standards for Foreign Currency Business, enterprises should use the market exchange rate as the accounting exchange rate. The market exchange rate refers to the central price of spot foreign exchange buying and selling announced by the Bank of China. Enterprises can choose the market exchange rate on the day when foreign currency business occurs or on the 1st of the month as the accounting exchange rate, but once selected, it cannot be changed at will when registering the account.

Differences in Trading Perspectives

Trading views refer to different views on whether exchange gains and losses should be recognized during settlement of foreign currency purchase and sale business. The view of a transaction is to regard the foreign currency purchase and sale business and its settlement as one business. The conversion difference generated will not be regarded as exchange gain or loss, but will be traced back to the original foreign currency business, and the difference will be adjusted to the original purchase cost or sales. On income. The two-transaction view is that the actual occurrence of foreign currency business is a sign of business completion. Purchase and payment, sales and collection are treated as two businesses. At the end of the accounting period and the payment settlement date, the conversion difference caused by the exchange rate difference will be Treated as exchange gains and losses and included in financial expenses.

The Impact of Exchange Gains and Losses on the Forex Market

Trade Balance

When a country's local currency depreciates, it is beneficial to increase exports, reduce imports, improve trade surplus or reduce trade deficit; conversely, when a country's local currency appreciates, it is beneficial to increase imports, reduce exports, worsen trade surplus or increase trade deficit.

International Balance of Payments

In addition to trade balance, exchange gains and losses also affect a country's capital balance and financial balance. When a country's local currency depreciates, it helps attract foreign investors to invest in the country's assets and increases net inflows under capital and financial items; conversely, when a country's local currency appreciates, it helps the country's investors invest in foreign assets. , increasing net outflows under capital and financial items.

Economic Growth

Exchange gains and losses affect a country's exports and imports, thereby affecting a country's total demand and total supply. When a country's local currency depreciates, it is conducive to improving export competitiveness, stimulating economic activities, and promoting economic growth; conversely, when a country's local currency appreciates, it is conducive to reducing import costs, curbing inflationary pressure, and alleviating economic overheating.

Inflation Level

Exchange gains and losses affect a country's import prices and export prices, thereby affecting a country's price level. When a country's local currency depreciates, it is conducive to raising the price of imported goods and increasing cost-push inflation; conversely, when a country's local currency appreciates, it is conducive to lowering the price of imported goods and reducing cost-pull inflation.