Hi
It is an accounting policy to revaluate all foreign currency items ( of short term assets & liabilities, current liabilities ( vendor open items), current assets ( customer open items) ) using the rate valid on the last of the period. In this way, any expected exchange rate gains or losses as on the last day of the period are taken into consideration while preparing financial statements to reflect true and fair view of financial position of the reporting entity.
For example, Local currency of company code is USD. The company code buys goods from US vendor who invoices in USD. Assume that company code bought items from US vendor for USD 100 on 10th Match 2013 when exchange rate is USD 1 = EUR 0.8
The company records purchase as below in both transaction currency & company code currency:
Inventory Dr. USD 100 EUR 80
Vendor Cr USD 100 EUR 80
Assume that EUR has further depreciated during March 2013 and at at the last day of the period, i.e 31st March 2013, exchange rate is USD1 = EUR 0.90. Due to exchange rate fluctuations, the company has to pay more EUR than the recorded liability in local currency. In other words, it has to pay EUR 10 more now. This represents losses due to exchange rate fluctuations.
Accounting Policy (GAAP) requires :
a) Profit & Loss statement to incorporate forex loss equivalent to EUR 10
b) Balance sheet shall contain adjusted vendor liability in local currency. i.e. EUR 90. It is incorrect to display vendor liability at EUR 80.
Hope above explanation will through some light on the points you require.
Regards
RK