In the valuation of foreign currency claims, one generally follows the otherwise determining rules for the valuation of working capital. This is done on the basis of the individual evaluation principle. Thus, the nominal value of the foreign exchange exposure is used. Even in the event of a loss in value, the otherwise also necessary unscheduled depreciation is carried out. Similarly, a revaluation is known for foreign currency claims. But this is fraught with peculiarities. If, at the end of the reporting period, the value of a foreign currency exposure whose residual maturity is one year or less is higher than the nominal value initially recognised, that higher value must be used to measure the foreign currency exposure.

1st Assessment of Foreign Currency Claims in the Balance Sheet – Introduction

The purchase of goods can be made both against direct payment and against invoice. Companies that prefer the second target purchase then simply pay the amount within the maturity. However, this deadline can even exceed one year of the year. So you have to include the outstanding liability or claim in the balance sheet.

However, there are some special features in accounting for foreign currency claims. After all, it is essentially a question of how to deal with the inevitable price fluctuations. Because if the exchange rate of the euro changes to a foreign currency, then either a profit or a loss can result. Whether you can or must show profits or losses of this kind on the balance sheet is another question. After all, the principle of individual assessment applies in general. So what you have to consider when assessing foreign currency claims is to be explained in this article.

2. How foreign exchange claims arise

In this article, we want to focus primarily on the assessment of foreign currency claims. They arise when a company subject to accounting makes deliveries or other services to a customer and agrees on a payment in a currency other than euro. For example, this is the case if a mechanical engineering company based in Germany agrees on a delivery to a customer who is based in a country where a currency other than the euro is national currency. In such a case, a payment of the services in euros can be contractually regulated in advance. However, some customers are often hardly barrier-free payment in other than their own currency. If the business is to take place anyway, then you probably have to accept the payment in foreign currency.

On the other hand, a foreign currency claim may be beneficial. For example, if you know that you want to settle your own liabilities in this foreign currency anyway in the near future. The advantage then lies in the fact that neither the sale nor the payment of own liabilities the risk of foreign currency losses is taken. In addition, it can even be advantageous to have a claim in foreign currency if one can expect a rise in the foreign currency against the euro. However, since the euro is a relatively stable currency, such a positive trend can only be seen as an advantage for certain foreign currencies. For example, this can currently be seen in the price of the Swiss franc against the euro. So accumulating foreign currency on a foreign currency account can be advantageous at least in the medium term.

3. Special features in the assessment of foreign exchange exposures

3.1. General valuation of foreign exchange exposures

First of all, we go into the normal case in the assessment of foreign currency claims. So we set such a demand for the same provisions of the Commercial Code in the balance sheet as all other demands. This means that we are taking them as part of an individual assessment. But already here we have the first special feature. This is because the valuation has to be made on the closing date according to § 256a sentence 1 HGB with the foreign exchange spot mean exchange rate.

If a foreign currency claim loses value, then it must be treated exactly as other assets in current assets. In other words, you have to write them off unscheduled. Thus, even in such a situation, there is no special feature in the valuation of foreign currency claims. The same applies in principle even if we have to carry out a value revaluation.

3.2. Valuation of foreign exchange exposures: special features in the reversal of value

You already suspect it: the “in principle” contained in the last sentence indicates a departure from the usual evaluation rules. In fact, § 256a sentence 2 HGB stipulates that this is exactly what has to be done if you have to assume a remaining term of a foreign currency claim of a maximum of one year. In detail, this legal standard prevents two other regulations. On the one hand, it leads to a suspension of the application of the realization principle otherwise sacrosanct in the HGB. This now means that unrealised gains have to be reported when valuing foreign currency claims. On the other hand, § 256a sentence 2 HGB also passes in such a case that the reversal of value, as required by § 253 paragraph 1 HGB, may be set at a maximum with the acquisition or production costs – here with the nominal value.

What does that mean exactly? This exceptional rule requires us to use the spot exchange rate when valuing a foreign currency exposure for which a residual maturity of a maximum of one year is assumed and whose value at the end of the reporting period is above the original nominal value. This is also not a right to vote, but a regulation contrary to the otherwise valid principles of the realisation principle and the protection of creditors in commercial law. And this is actually something special.

4th Assessment of Foreign Currency Claims – Conclusion

So we find that the valuation of foreign currency claims has quite a few surprises in petto. Instead of applying the otherwise usual principles for the valuation of working capital, the legislature has opted for a radically different approach when introducing § 256a HGB. How radical this path is is shown by the fact that it has even excluded the right to vote as an alternative. It is true that this valuation of foreign exchange claims is only provided for in exceptional cases, and only if the remaining maturity is one year or less. But the situation in which such a revaluation – in fact, it is even an overvaluation, if you compare it with the general rules – can be regarded as everyday in practice. This also means that one must always be vigilant when assessing foreign currency claims. And with a progressive globalization of our economy, especially for companies based in Germany, this aspect is likely to be of even greater importance.