The Impact of Unrealized Foreign Exchange Differences for Accounting and Taxation

The present study is intended to be an analysis of the main Romanian legal provision in what concerns the impact of foreign exchange differences and potential consequences at the level of financial statements for companies. In Romanian legislation, the issue of the foreign exchange differences is treated at a general level: these are recognized as a profit and loss item and as a consequence, they are included in the taxable base when booked in the accounting. Our legislation does not provide for specific treatments depending on the “realization moment” of these differences or depending on the conditions for recognizing a gain/loss from foreign exchange differences. For the unrealized exchange differences arising from the application of accounting rules on monthly assessment of foreign currency monetary items, there is not a specific event or transaction to determine income or expenditure. This monthly review depending on the National Bank of Romania [BNR] foreign exchange rate valid on the last day of the month aims to bring closer to reality the financial position of an entity. The exchange rate is a monetary policy item set by the central bank and may be influenced by various factors such as: monetary policy of the BNR; inflation target objectives and rate of exchange stabilization or reduction efforts, as is the case of BNR in the last years to fulfill EU criteria for adoption of the EURO; periodical influences of speculative capitals on the exchange rate level; economic status and especially exports and imports. However, a taxpayer should not be charged unless there is evidence of the “economic enrichment” thereof. However, this enrichment, seen as a rising economic value of the company, depends on the perspective from which is seen: the owner of the company or the tax authorities. The exchange differences impact also the value of the owners’ equity for which a minimum level is requested under the commercial company law. In case of negative values, this triggers various risks at the level of the continuity principle or even endangers the existence of the company.