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What's a foreign exchange transaction?

by , 30 January 2014
Do you regularly buy goods and materials from overseas suppliers? If so, you need to have a clear understanding of foreign exchange transactions. Continue reading to find out more about these transactions and how you must treat them.

Not sure what a foreign exchange transaction is? If so, here's an explanation for you.

Foreign exchange transactions explained

According to the Practical Accountancy Loose Leaf, a foreign exchange transaction is a transaction where you buy or sell an asset, which is denominated in a foreign currency.

The two most common foreign exchange transactions are:

  1. Importing goods and services; and
  2. Exporting goods and services.

You need to be very careful when you deal with foreign exchange transactions.

Why?

SARS scrutinises these.

But there's no need to worry.

We'll help you make sure your foreign exchange transactions stay on the right side of SARS.

There are two significant foreign exchange risks you might come across.

#1: If you owe money to someone overseas and the exchange rate increases, 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!

Luckily, there's a way to deal with these foreign exchange risks.

Follow these five easy steps when dealing with foreign exchange transactions

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

Knowing what foreign exchange transactions are and how to deal with them will help ensure you're on the right side of SARS.

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