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Two foreign exchange risks you MUST avoid

by , 21 October 2013
A foreign exchange transaction is a transaction where you buy or sell an asset which is denominated in a foreign currency. There are two risks associated with them. Read on to find out what they are so you can ensure yours stay on the right side of SARS.

According to the Practical Accountancy Loose Leaf, the two most common foreign exchange transactions are:

  • Importing goods and services.
  • Exporting goods and services.

You must avoid these two significant foreign exchange risks

#1: If you owe money to someone overseas and the exchange rate increase, you might end up owing him a lot more money than you originally did.

#2: If you receive money from someone overseas and the exchange rate strengthens in favour of the rand, you might end up receiving less money than you originally hoped.

Here's how to stay on the right side of SARS when dealing with foreign exchange transactions.

FSP Business recommends you follow these five steps to ensure you never misstate your foreign exchange transactions:

Step #1: Convert the foreign amount to rands at spot rate on transaction date and record the purchase or sale at the converted amount.
Step #2: Identify any amounts you owe, or amounts that are owed to you, in a foreign currency.
Step #3: Restate the value of any money that you owe, at the spot rate, on each reporting date.
Step #4: Restate the value of any money that you owe, at the spot rate, at the settlement date.
Step #5: Make your final payment on settlement date.

It's that simple. Dealing with foreign exchange transactions will be a breeze if you steer clear of the risks outlined.



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