How Microsoft Dynamics NAV Can Turn Ever-Sharper Foreign Currency Fluctuations to Your Advantage

Before the global economic recession became apparent earlier this year, the Euro had been growing stronger compared with the U.S. Dollar. But now that the U.S. economy is recovering, and the foundations of the European Union economy have been shaken by the bankruptcies or near-bankruptcies of several countries such as Greece, things are changing rapidly. The Euro has been through a sharp decline, while the U.S.Dollar has grown stronger, and the Swiss Franc has maintained its strong and stable rate.

If you are only doing business within the borders of your own country,  you at least don't have to worry about currency exchange rate fluctuations. However, the likelihood that you only have domestic suppliers and customers in this global economy is remote. More likely, you are either making or losing money because of currency fluctuations. And there is seemingly nothing you can do about it. Except, in fact - you actually can do something about it.

According to IAS (International Accounting Standard) 21, currency exchange is defined as "exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognized or in previous financial statements".

In plain English, currency exchange gains represent the difference between local currency amounts of the same foreign currency amount at two different dates. The situations in which exchange gains or losses are generated typically occur when exchange rates differ at the invoicing date and the payment date; or the invoicing date and the period closing date. For example, if a purchase invoice of €1,000 is invoiced at the rate of 1.25, and paid at the rate of 1.35, then the liability is registered at $1,250 and settled at $1,350. The difference of $100 is registered as exchange loss.