December 2020 - Deloitte

Foreign currency transactions:Accounting considerationsfor banks and microfinanceentities in Cambodia.December 2020

Foreign currency transactions Accounting considerations for banks and microfinance entities in CambodiaIntroductionCambodia’s central bank – the National Bank of Cambodia (“NBC”)– is the supervisory body for banks and financial institutions(hereafter collectively referred to as “FSIs”) in Cambodia. The NBChas issued various pieces of regulation which, inter alia, containrequirements in relation to: The use of a prescribed chart of accounts: This includes twoaccounts – “foreign-exchange position account” (“positionaccount”) and “equivalence foreign-exchange position account”(“equivalence account”) – intended to facilitate the trackingof the scale of an entity’s net asset/liability position in foreigncurrencies and, therefore, its exposure to foreign-exchange risk.The required financial reporting framework for FSIs is eitherCambodian International Financial Reporting Standards(“CIFRS”) or Cambodian Financial Reporting Standard for Smalland Medium-Sized Entities (“CIFRS for SMEs”), with thosehaving public accountability being required to apply the former.There are, therefore, two sources of regulation relevant to theaccounting for foreign currency transactions and balancesrelevant to FSIs in Cambodia: that issued by the NBC, andCIFRS/CIFRS for SMEs. This publication explores the use of theposition and equivalence accounts, as mandated by the NBC,and the requirements under CIAS 21 (assumes CIFRS reporter),in accounting for transactions and balances denominated inforeign currencies.1. NBC requirements1.1. Cross-currency accounting and the position andequivalence accountsIn its second version of the Chart of Accounts Manual, the NBCincludes the following two account types: Account 29 67 00 equivalence foreign exchange positionaccount – used as a functional currency mirror to the below“position account”. Its balance, as at any point in time,representing the functional-currency value of the associatedforeign currency’s net asset/(liability) holding, at the spot rate, atthe reporting date. Account 38 60 00 position account foreign exchange – used torecord the value of foreign currency (assets)/liabilities – in foreigncurrency – on an FSI’s balance sheet.02Users of the multi-currency accounting systems will require oneposition account per foreign currency (postings to which will bemade in the requisite foreign currencies), and one equivalenceaccount per foreign currency (postings to which will be made infunctional currency).The relevant NBC regulations are namely those of Prakas no.B7-00-50 (February 2000 - “Prakas”) and the circular on multicurrency accounting following implementation of uniform chart ofaccounts (February 2005 - “Circular”).It is important to note that within the NBC’s prescribed chart ofaccounts it is assumed FSIs’ accounting systems have multi-currencycapability and, in essence, the base chart of accounts is duplicatedfor each currency implicated (each subset of currency accountcodes being referred to as “ledgers” below), these accounts beingdifferentiated by the final two digits of the account code as per NBCaccount code structure convention. The Circular makes it clearthat each ledger should net to zero in its own right (in its requisitecurrency), as should – obviously – the trial balance, in functionalcurrency, as a whole.An overall foreign-exchange “position” per foreign currency,as the NBC refers to it, is essentially the value of net assets orliabilities held in the foreign currency. The Circular gives examplesof how this exchange position is captured, whilst simultaneouslymaintaining the inherent balance within the individual currencyledgers, when processing cross-currency transactions – that is,when a journal has entries in more than one currency. The Circular,Prakas, and the prescribed chart of accounts explain how theposition accounts – being denominated in foreign currencies bydesign - should be revalued at the spot rate prevailing at eachreporting date, with gains/losses being reflected in the profitand loss account. As the functional currency values of the initialpostings to the position and equivalence accounts will nearlyalways be equal (because the position account values will berecorded at the NBC spot rate and, unless the transaction ratediffers from this NBC spot rate, so too will the postings to theequivalence accounts), then the revaluing of the position accountstemporarily causes the functional currency values of these twoaccounts to diverge. These accounts are re-aligned by way of ajournal in the functional currency ledger in functional currency, toFX gains/loss, its counter entry being the associated equivalenceaccount. Consequently, as at any reporting date, the functionalcurrency values of the position accounts and the equivalenceaccounts should net to zero, and have nil impact on equity value.

Foreign currency transactions Accounting considerations for banks and microfinance entities in CambodiaIn the examples and commentary below: It is assumed that the net asset/liability holdings in foreigncurrency are purely monetary assets/liabilities The currency denomination of the account code being usedis shown by the currency symbol in brackets at the end of theaccount namesExample 1Assume Entity XYZ, which has a functional currency of US dollars( ), purchases Euros ( ). 10,000 is purchased for 12,000 ( 1/ 1.2)on 15/01/20X0. Entity XYZ revalues its foreign currency monetaryassets/liabilities once per month as part of its month-end routine.This ensures the sum of the position accounts and equivalentaccounts, in functional currency, nets to zero at every reportingdate.2. On 14/02/20X0, 5,000 were used to purchase dollars.The spot rate at the point of purchase resulting in 7,250being received ( 1/ 1.45):Dr bank ( ) 7,250Cr equivalence account ( ) 7,250Dr position account ( ) 5,000Cr Bank ( ) 5,000Journal entry required on 15/01/20X0:Dr bank ( ) 10,000Cr position account ( ) 10,0001Dr equivalence account ( ) 12,0002Cr Bank ( ) 12,000Example 2Entity XYZ continues to hold the 10,000 euros until the monthend (31/01/20X0). Therefore, they are revalued along with theassociated position account. Shortly after month end, 5,000are sold back into dollars – the entity’s functional currency. Therevaluation routine was then run at the end of month 02.1.Month-end revaluation (month 01) - over the remainderof the month, the dollar weakened overall against theEuro, such that the spot rate at the month end values 10,000 at 13,000 ( 1/ 1.3):3.Assuming the exchange rate does not then movebetween the 14th and end of month 02, the revaluationroutine will recognise the increase in value during thisperiod on both the 5,000 sold and the 5,000 remainingin the bank:There will be a residual foreign exchange gain on the eurobank account in respect of the 5,000 sold on the 14th, and anunrealised gain to be recognised for the remaining 5,000 cashat bank balance, each equal to 750. There will be residual debiton the position account in respect of the gain on the sold eurosof 750, and the remaining position value will also be revaluedupwards (causing a loss) by 750 for the foreign exchangemovement on the remaining 5,000 held. There will be a residualcredit on the equivalence account of 750 for the 5,000 eurossold, and the remaining equivalence value will also be revaluedupwards (causing a gain of 750, in order to match the movementin the position account):Dr bank ( ) 1,000Cr position account ( ) 1,0003Dr Bank ( ) 1,500Cr position account ( ) 1,500Dr equivalence account ( ) 1,0004Cr Foreign exchange gain ( ) 1,000Dr equivalence account ( ) 1,500Cr foreign exchange gain ( ) 1,5001.2.3.4.By increasing the entity’s foreign-currency asset value, its position in (and therefore exposure to) euros changes.Booked at the spot rate of the transaction. If the cross-currency transaction rate is different to the spot rate as per the NBC, there will be day 0 FX gain/lossin the discrepancy this creates between the equivalence and position accounts.The position account will reflect the net asset/liability value in the associated foreign currency, so the revaluation of this account will “neutralize” the FXgains/losses on the underlying foreign currency asset/liability position originated through cross-currency transactions until the equivalence accounts arealso “revalued”.The equivalence accounts are then required to be matched to their respective position accounts’ values in functional currency (the divergences are causedby the revaluation of the position accounts, but not the equivalence accounts: due to the former being foreign currency accounts and the latter functionalcurrency accounts) with the change in value taken to foreign exchange gains/losses in the P&L. This being referred to in footnote 3 above as the equivalenceaccounts being “revalued”.03