Multi-Currency Revenue Recognition Mismatch
A software company sells annual subscriptions in EUR to European customers while its base (parent) currency is USD. In Q3, an invoice for €120,000 was created when the EUR/USD rate was 1.10. By quarter-end the rate moved to 1.05. The controller notices that the income statement shows revenue at a different USD amount than the invoice's original USD equivalent, and the balance sheet shows an unrealized gain/loss on the receivable. The company records revenue at invoice creation and does not use advanced revenue recognition. They want to understand the variance before the board report in 5 days.
1. Explain the source of the USD variance between the invoice and the income statement.
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The variance is foreign currency revaluation, not a revenue error.
- The invoice was recorded at the transaction-date rate (€120,000 × 1.10 = $132,000).
- The receivable is a monetary asset; at period end it is revalued at the closing rate (€120,000 × 1.05 = $126,000), producing an unrealized loss of $6,000 on the balance sheet.
- Revenue recognized at invoice creation stays at $132,000 (historical rate). The income statement difference the controller sees is the revaluation gain/loss line, not revenue.
So: revenue = historical rate; receivable = closing rate; the $6,000 delta is an unrealized FX adjustment. Confirm the revaluation is posted to the correct FX gain/loss account.
2. What should the controller verify before the board report to ensure the numbers are correctly classified?
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Verify:
- Currency of the transaction and the base currency - confirm the invoice is EUR and the base is USD, and that the rate used at creation is the transaction-date rate.
- Revaluation posting - confirm the period-end revaluation ran and posted the $6,000 to an unrealized FX gain/loss account, not to revenue.
- Revenue account - confirm revenue is at $132,000 (historical), not the revalued amount.
- Rate source - confirm the closing rate (1.05) is the one applied at period end.
If revenue itself moved, that indicates a configuration error (e.g., revenue recognized at closing rate) and must be corrected before the report. Otherwise, present the $6,000 as an unrealized FX loss.