Foreign exchange rate used to calculate contract total value and recognize revenue

Foreign Exchange Rate to calculate total value and recognize revenue

Recently, our sub in a foreign country entered a multiple year software licensing agreement with a local customer resides outside that foreign country. The sub delivered the licenses two days after the contract signing. However, the customer won’t be billed anything until one month later. The deal does not involve customization of the licenses and services element are not essential to other elements in the transaction. Due to lack of VSOE for undelivered elements, mainly services and maintenance, the whole arrangement will be recognized ratably over the longer term of maintenance and services. The tricky point is that at which foreign exchange rate that should be used to calculate the total contract value for booking purpose as well as recognize revenue. Shall we use the spot rate at the contract signing or at the rate the actual invoice is generated (know that invoicing is processed one month after the contract signing).

Answers

Peter Lyons, MBA, CMA Finance and Technology Enthusiast • January 6, 2011

All revenue should be translated at the spot rate when revenue is recognized. The translation loss/gain between the transaction date and settlement date would be reported under comprehensive income.

In your particular case where you are waiting 30 days before remitting an invoice your revenue recognition would look something similar to this:

January - Revenue Recognized
Debit: A/R unbilled
Credit: Revenue

February - Invoice is remitted
Debit: A/R billed
Credit/Debit: Translation gain/(loss)
Credit: A/R unbilled

March - Funds are received
Debit: Cash
Credit/Debit: Translaton gain/(loss)
Credit: A/R billed

Hope this helps.

Pete

Kevin Roones Senior Accounting Professional • January 6, 2011

I assume that the foreign sub keeps its books in a functional currency other than the US dollar, and that USD is your reporting currency. The recording of the transaction on the subs books is not an issue; they will record the transaction as deferred revenue and recognize the revenue ratably.
The first question is how are the payment terms stated in the contract? Is the customer going to pay in the functional currency of the sub or in USD? If the customer is paying in the functional currency, then all the translation issues will shake out in consolidation. If the customer is paying the foreign sub in USD, then any differences between the amount invoiced in the functional currency and the amount received in USD translated to the functional currency would go as translation gain or loss on the foreign sub's P&L.
When the foreign subs books are translated to USD for reporting purposes, the revenue will be translated at the average rate for the month and the balance sheet amounts (receivables; deferred revenue) will be translated at the spot rate. Any resulting difference will be reported as other comprehensive income on the balance sheet.
AS far as reporting the contract value, I would report it in the foreign currency if that is how the contract is worded, and then translate it at the current spot rate for the reporting period and disclose the USD figure also.
If the contract is stated in USD then that is how I would disclose it.

The short answer is to look at the contract for your answers.

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