Foreign Currency Transaction

Foreign currency transaction is a transaction that requires settlement (payment or receipt) in foreign currency. Companies working with foreign currencies are required to report their transactions in their financial statements in their functional currency, using the daily spot exchange rate. Sometimes there may be a substantial time gap between the transaction time – the moment when the firm commits to a transaction and the payment being settled.  When the exchange rate changes between the original transaction time and the settlement date, there is a gain or loss on the exchange.