Handle Foreign Currency Transactions

Learning Objectives
 Identify nature of customer's foreign currency needs
 Describe a foreign currency transaction.
 Understand some of more common foreign currency transactions.
 Basic understanding of foreign currency and changes in exchange rates
 Describe and understand a forward exchange contract and spot and forward rates
 Identify participants and currencies
 Conduct the transaction and Calculate & use cross and forward rates
 Verify that the proposed transaction can be conducted
 Maintain accurate records of transaction
Introduction
Why Handle foreign currency transactions
 Many companies in the world engage in international activities such as exporting or importing goods,
establishing a foreign branch, o in a foreign company.
 Recording and reporting problems are encountered when transactions with a foreign company or the
financial statements of a foreign branch are measured in a currency other than their own currency.
 Transactions to be settled in a foreign currency must be translated /expressed in local currency before they
can be aggregated with the domestic transactions of the local firm.
 The expansion of international business has been of particul ar concern to accountants because of
developments in the worldwide monetary system.
This course includes a discussion of the nature and use of exchange rates in the translation process, as well as
the accounting standards applied in the translation of transactions measured in a foreign currency
LEARNING GUIDE # 1
Identify Nature of Customer's Foreign Currency Needs.
In the context of our country as per Proclamation No. 591/2008 Establishment by the National Bank of
Ethiopia "Foreign currency" means any currency other than Ethiopian currency which is legal tender in any
country outside Ethiopia as to which the National Bank has declared to be acceptable for payment in Ethiopia or
purposes of foreign exchange from /to its customer.
In general foreign currency needs is any foreign currency exchange needed by customers which require the
conversion of one currency to another at an agreed exchange rate. It also might be transactions that require
payment or receipt (settlement) in a foreign exchange market.
The foreign exchange market is the mechanism by which participants:
 Transfer purchasing power between countries;
 obtain or provide credit for international trade transactions, and
 Minimize exposure to the risks of exchange rate changes.
A. Participants in Commercial and Investment of foreign currency Transactions:
Importers and exporters, international portfolio investors, multinational firms, tourists, and others use the
foreign exchange market to facilitate execution of commercial or investment transactions. Some of these
participants use the foreign exchange market to hedge foreign exchange risk.
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The foreign exchange market consists of two tiers: the interbank or wholesale market, and the client or
retail market (specific, smaller amounts). Individual transactions in the interbank market usually involve
large sums that are multiples of a million home currencies or the equivalent value in other currencies. By
contrast, contracts between a bank and its client are usually for specific amounts, sometimes down to the
last penny.
A nation’s commercial banks operate as clearinghouses for the foreign exchange demanded and supplied
in the course of foreign transactions by the nation’s residents.
Five broad categories of participants operate within these two tiers: bank and nonbank foreign exchange dealers,
individuals and firms, speculators and arbitragers, central banks and treasuries, and foreign exchange brokers .
1. Banks, and a few nonbank foreign exchange dealers, operate in both the interbank and client markets.
They profit from buying foreign exchange at a bid price and reselling it at a slightly higher ask price.
Dealers in the foreign exchange department of large international banks often function as “market
makers.” These dealers stand willing at all times to buy and sell those currencies in which they
specialize and thus maintain an “inventory” position in those currencies Worldwide competitions among
dealers narrows the spread between bid and ask and so contributes to making the foreign exchange
market efficient in the same sense as securities markets.
2. Individuals (such as tourists) and firms (such as importers, exporters and MNEs) conduct commercial
and investment transactions in the foreign exchange market. Their use of the foreign exchange market is
necessary but nevertheless incidental to their underlying commercial or investment purpose. Some of the
participants use the market to “hedge” their foreign exchange risk.
3. Speculators and arbitragers
Speculators and arbitragers seek to profit from trading in the market itself. They operate in their own
interest, without a need or obligation to serve clients or ensure a continuous market. While dealers seek
the bid/ask spread, speculators seek all the profit from exchange rate changes and arbitragers try to profit
from simultaneous exchange rate differences in different markets.
4. Central Banks and Treasuries:
Central banks and treasuries use the market to acquire or spend their country's foreign exchange reserves
as well as to influence the price at which their own currency is traded. They may act to support the value
of their own currency because of policies adopted at the national level or because of commitments
entered into through membership in joint agreements such as the European Monetary System. The
motive is not to earn a profit as such, but rather to influence the foreign exchange value of their currency
in a manner that will benefit the interests of their citizens. In many instances they do best when they
willingly take a loss on their foreign exchange transactions. As willing loss takers, central banks and
treasuries differ in motive and behavior form all other market participants.
5. Foreign Exchange Brokers:

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 Foreign exchange brokers are agents who facilitate trading between dealers without themselves
becoming principals in the transaction. For this service, they charge a small commission, and maintain
access to hundreds of dealers worldwide via open telephone lines. It is a broker's business to know at
any moment exactly which dealers want to buy or sell any currency. This knowledge enables the broker
to find a counterpart for a client quickly without revealing the identity of either party until after an
agreement has been reached.
Four levels of translators or participants can be identified four levels:
 Central Bank seller or buyer of last resort (fourth level)
 Foreign exchange brokers interbank or wholesale market (third level)
 Commercial banks clearing houses (second level)
 Traditional users’ tourists, importers, exporters, investors (first level)
The nature of customer's foreign currency needs in Ethiopia is fully controlled and managed by the National
Bank Ethiopia through issuing foreign exchange regulations. As per the regulations No person shall engage in
any transaction in foreign exchange except with banks or authorized dealers or with the special permission of the
National Bank. Accordingly, the regulations Allow payments for
B. All imports and exports of goods and services except goods that affect the health of the public and security of the nation.
C. Foreign cash notes and travelers cheques for payments at hotels certified by the Ethiopian Tourism Commission, duty free
shop operators, Immigration Office, Civil Aviation Authority and airline ticket offices.
D. salary remittance by foreign employees, insurance payment, re-transfer of unutilized foreign currency holdings, etc.
E. credit cards can be made for catering services and purchase of goods by travelers and tourists, and credit card holders can
also obtain local currency from banks by making use of their credit cards.
F. firms, companies, and business entities engaged in manufacturing or business activity allowed to have access to external
financing and suppliers' credit from abroad to finance imports of input
G. Foreign investors who earn profits or dividends from recognized investments and services are allowed to remit abroad by
presenting the required documents or statements.
H. Permit transfers for various services, including money drawn from Non-Transferable Accounts, Non-Resident Foreign
Currency NR FCY, Non-Resident Transferable Birr (NRT), and Non-Resident Non-Transferable (NRNT).
Functions of the Foreign Exchange Market
The foreign exchange market is the mechanism, by which a person of firm transfers purchasing power form
one country to another, obtains or provides credit for international trade transactions, and minimizes
exposure to foreign exchange risk. Transfer of Funds or Purchasing Power from one Nation and Currency to
Another
1. Transfer of Purchasing Power: Transfer of purchasing power is necessary because international
transactions normally involve parties in countries with different national currencies. Each party usually
wants to deal in its own currency, but the transaction can be invoiced in only one currency.
2. Provision of Credit: Because the movement of goods between countries takes time, inventory in transit
must be financed.
3. Minimizing Foreign Exchange Risk: The foreign exchange market provides "hedging" facilities for
transferring foreign Exchange risk to someone else.
Under this section we will cover the following points
1. The nature of the foreign currency transaction is clarified with the customer.
2. Relevant information is obtained from the customer including verifying the identity of the person presenting
notes for sale or wishing to purchase foreign currency according to organisational policy and procedures
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 3. Customer requests for foreign currency dealings are handled in accordance within the officer's authority to
approve transactions.
1.1. The nature of the foreign currency transaction is clarified with the customer
A transaction that requires payment or receipt (settlement) in a foreign currency is called a foreign currency
transaction. Foreign currency transactions are economic activities denominated in a currency other than the
entity’s recording currency. Therefore foreign currency transaction is an agreement between a buyer and a
seller that a given amount of one currency is to be delivered at a specified rate for some other currency.
A foreign currency transaction will be settled in a foreign currency due to various reasons foreign exchange
market. These include:
1. Purchases or sales of goods or services (imports or exports), prices are stated in a foreign currency
2. Loans payable or receivable in a foreign currency
3. Purchase or sale of foreign currency forward exchange contracts
4. Purchase or sale of foreign currency units.
In the context of our country, the proclamation defined transaction in foreign exchange as a means that
 The transfer, borrowing, lending, assignment, exchange, purchase, sale, receipt, payment or crediting of
foreign exchange; and
 The conclusion of any contract, agreement, arrangement or understanding, as a result of which any
foreign exchange is transferred, borrowed, lent, assigned, exchanged, purchased, sold, received, paid or
credited within or outside Ethiopia; and in which Banks accepts for purposes of foreign exchange from /to
its customer. The customer may be:
 A customer of another financial institution and An existing customer
 A resident or non-resident of Ethiopia and A new customer
In Ethiopia foreign currency transactions may include:
 Conversion of Ethiopian birr to another currency - Overseas bank cheques
 International drafts - Traveller’s cheques
 Telegraphic transfers - Foreign notes and coins.
1.2 Relevant information is obtained from the customer including verifying the identity of the person
presenting notes for sale or wishing to purchase foreign currency according to organisational policy
and procedures.
“Foreign exchange” means any foreign currency, cheques, bills of exchange, promissory notes, drafts,
securities, and other negotiable instruments, expressed in foreign currency as well as bank balances in account
held in foreign currency or assets in the form of foreign account crediting or set-off arrangements, expressed or
payable in foreign currencies provided they are acceptable by the National Bank;
Each Foreign exchange transactions (FET) in which customers enter into will be subject to the Terms and
Conditions for doing business with foreign currency.
 It might be required to sign these before entering into an FET for the first time.
 it may also need to provide the signed documentation together with other information that banks may
require in its standard application such “Know your Customer”:
Upon completion of these documents banks will conduct an accreditation process. The main checks that are
relevant to the accreditation of a customer are:
 Verification of a customer’s identity in accordance with relevant banks laws

 A successful credit check conducted through a third party credit agency

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  Assessment considering relevant factors such as the nature of customers, businesses and the country
where they will make or receive payments.
After your application has been accepted you may apply for an FET in accordance with the Terms and
Conditions for doing business with foreign currency transaction. Commercial Banks which are licensed to
operate in Ethiopia are authorized to allow imports and exports with some exceptions and provide associated
services against submission of the required relevant documents or information’s by the importer and exporter.
 The relevant documents or information may depend on the banks customer types and needs for various
foreign currency transactions.
1. Importers
Commercial Banks shall approve imports for any values are subject to open international competitive bidding
backed by relevant documents. The required documents to be submitted by an importer under L/C are:-
1. An application form duly completed, signed & sealed
2. Three copies of proforma invoices showing clearly full description of goods, including quantity, grade,
quality, volume, measurement, weight, mode of shipment, terms of payment, unit an total price of the
goods at a named place of delivery.
3. Photocopy of valid trade licenses for foreign trade, investment or industry.
4. Insurance certificate from licensed local insurance company.
5. Clearance certificate from NBE that he/she has settled its outstanding commitment
2. Exporters
No natural/ juridical person, may export, or enter into any commitment to export valuable goods without the
prior approval of the authorized Bank. and unless the exporter undertakes to surrender the resultant sales
proceeds in foreign exchange to an authorized bank either before the actual export, at the time of export, or
within a period of not later than three months or within such other period that the NBE may from time to time
prescribe for any class of exports or for any particular export.
A. Commercial Banks shall allow exports for goods to be exported abroad other than coffee, against submission
of the following documents.
a) Valid foreign trade license for export
b) Copy of authenticated L/C
c) 5 copies of Customs Declaration duly completed, signed and sealed
d) 6 copies of Banks declarations duly completed, signed and sealed
e) 2 copies of invoices duly completed, signed and sealed.
f) A copy of sales contract.
3. Travelers
Holiday Traveler
An individual Ethiopian national or resident for holiday trip outside Ethiopia upon presentation of passport, valid
exit visa and air ticket. The amount shall be endorsed at the back of the passport and on the air ticket with the
requested stamp.
Business Travel
A Forex Bureau may sell foreign exchange for a business travel upon presentation of valid licenses together with
passport, valid exit visa and air ticket.
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 Medical traveler
A forex Bureau may sell foreign exchange for a bone-fide medication abroad upon presentation of medical board
certificate, passport, valid exit visa, and air ticket. Additional forex may be approved to a patient being treated
abroad against his application by such documents as medical bills or hospital accounts showing how the foreign
exchange initially granted was expended and medical certificate issued and signed by the attending foreign
specialist or medical center giving estimate of the medication fee that may be needed in the immediate future.
Educational traveler
A Forex Bureau may sell foreign exchange for a bona-fide tuition fee and subsistence allowance subject to the
presentation of the following documents.
a) Evidence showing that the student is an Ethiopian citizen;
b) Admission letter from learning;
c) In the case of a continuing student, evidence that the student is still enrolled and attending the institution;
d) The relevant statement and letters from the educational institutions signed by the principal or top executive of
the educational institution concerned showing details of the various costs needed for a given academic period.
Seminar, Workshop, Symposium, Conference and Training Fees
A Forex Bureau may sell foreign exchange for a bona-fide seminar, workshop, symposium, conference, and
training fees. Payment of same shall be made to institutions abroad through Commercial Banks.
Others
A forex bureau may sell foreign exchange to professionals, public organizations, exporters, importers,
industrialists, mining, construction bank, insurance, and/or export oriented agricultural activities for their own
use to the extent of their request for purchase of publications, periodicals, journals etc. However, payment of
same shall be made to institutions abroad through Commercial banks
1.3 Customer requests for foreign currency dealings are handled in accordance within the
officer's authority to approve transactions
The management and operations function of foreign exchange transactions have been transferred from National
Bank of Ethiopia to commercial banks via directive no. FXD/07/1998 issued on August 31, 1998, the newly
issued ones in one document for ease of reference, use and knowledge of the rules of the foreign exchange
regime of the country.
These directives are believed to give detailed information on the foreign exchange transaction rules and
procedures of the country, and provide a better understanding of what the country's exchange regime is like. Any
bank, insurer, authorized dealer or any other person shall, when directed by the National Bank, produce to it
or its designated representative all information, books, records, accounts and other documents in its possession or
control which may be required for the purpose of ascertaining whether or not the provisions of this Proclamation
and directives issued by the National Bank are complied with.
No person shall engage in any transaction of foreign exchange except with banks or authorized dealers or with
the special permission of the National Bank. The terms, conditions, limitations and circumstances for transfer of
foreign exchange to and from Ethiopia, and the export or import of valuable goods or the transfer of other

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valuable goods across the customs boundaries or frontiers of Ethiopia in any manner, the return of such goods
and the settlement of any foreign exchange that results, from export or import or transfer under which residents
of Ethiopia, and non-residents visiting Ethiopia or any other person may possess and utilize foreign currency or
instruments of payments in foreign exchange shall be determined by directive issued by the National Bank .
For example
Proclamation No. 83/1994, the National Bank of Ethiopia hereby amends Directive No. FXD/24/2004
issued on the establishment and operation of foreign currency account for nonresident Ethiopians in
domestic commercial banks. For the purpose of these Directives, unless the context provides otherwise,
 “Non-resident Ethiopians” shall mean:
a) All Ethiopian nationals living and working abroad outside Ethiopia for more than one year
b) Business entities owned by non-resident Ethiopians and located outside the Ethiopian territory for
more than one year
 “Non-Resident (NR) Foreign Nationals of Ethiopian Origin” shall mean
1) A non-resident and holder of a valid identification card, obtained pursuant to Proclamation 270/94,
attesting that he/she is a foreign national of Ethiopian origin.
2) Business entities owned by non-resident foreign nationals of Ethiopian origin and located outside the
Ethiopian territory.
 “Non- Resident (NR) Foreign Currency Account” refers to the two types of accounts stated under
Article 4 of this Directive and maintained in foreign currency by the debit of which funds can be
transferred abroad and/or used locally without any permit from the Bank
Thus the following individuals and/or enterprises may open a foreign currency account in any of the
authorized commercial banks in Ethiopia.
a) Non-Resident Ethiopian
b) Non-Resident Foreign Nationals of Ethiopian origin
 Non-Resident Ethiopians/foreign nationals of Ethiopian origin shall present the following documents to
open an NR Foreign Currency Account in domestic banks.
a) Application forms properly filled and signed by the account holder
b) For individuals, valid passport and/or identification card of foreign nationals of Ethiopian origin of the
applicant
c) For businesses, certificate of ownership entitlement for the organization and/or article and memorandum
of association.
 Applicants who could not be physically present to open the NR account in the domestic banks shall use
the Ethiopian Embassies nearby to prove their identities
The National Bank may keep balances, denominated in foreign currencies, with foreign central banks, its
agents or correspondents abroad, and may invest, at its discretion, such balances in time deposits, gold,
readily negotiable foreign securities and other investment instruments.
LEARNING GUIDE #2

Verify that the proposed transaction can be conducted

Commercial terms of a particular FET will be agreed and binding at the time of dealing. This may occur
verbally over the phone, electronically or in any other manner set out in Terms and Conditions for doing
business with banks. Ethiopian Revenues and Customs Authority shall not allow import or export of
valuable goods or foreign exchange unless conditions, circumstances and terms determined by the National
Bank are fulfilled.

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 Shortly after entering into an FET will send a Confirmation outlining the commercial terms of the deal; this
Confirmation is intended to reflect the transaction that have entered into with banks. It is important that
check the Confirmation to make sure that it accurately records the terms of the transaction. It should note
however that there is no cooling off period with respect to an FET and that will be bound once your original
instruction has been accepted by banks regardless of whether it is sign or acknowledge a confirmation. In
the event that there is a discrepancy between your understanding of the FET and the Confirmation it is
important that you raise this with banks as a matter or urgency.
 The current Foreign Exchange Regulations of our Country allow payments for all imports of goods,
except goods that are believed to be detrimental to the health of the public and security of the nation.
Payments for imports can be made by letter of credit, cash against documents, advance payment, etc.
Imports of second hand or used goods are also allowed, more specifically various used vehicles,
machinery and equipment, in which foreign exchange is availed to these items in relation to their service
year after manufacture and the original FOB price.
 Similarly, exports of goods and services are allowed through letter of credit, cash against document,
advance payment, consignment, etc., and payments for services associated with these exports are also
permitted. Small items of limited value and quantity are also allowed to be exported without foreign
exchange repatriation requirements.
 With a view to encouraging and supporting the export sector, the foreign exchange regime allows exporters
to open a retention account to hold a specified amount of their export earnings for a defined period and use
their forex holdings for their export business promotion. A credit guarantee scheme is also made available
to exporters to back the export sector.
 Furthermore, the exchange regulations permit transfers for various services, including money drawn from
Non-Transferable Accounts, Non-Resident Foreign Currency NR Fcy, Non-Resident Transferable Birr
(NRT), and Non-Resident Non-Transferable (NRNT). Exchange transactions also allow salary remittance
by foreign employees, insurance payment, re-transfer of unutilized foreign currency holdings, etc.
Non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin are permitted to open a
foreign currency account at any authorized commercial bank in four major international currencies with
a limited amount that shall be deposited in current account. The deposits shall earn interest based on the
arrangements made with commercial banks.
 Foreign cash notes and travelers cheques are also acceptable for payments at hotels certified by the
Ethiopian Tourism Commission, duty free shop operators, Immigration Office, Civil Aviation Authority
and airline ticket offices.
 Capital gain on asset revaluation of a business enterprise may be repatriated by fulfilling the necessary
requirements. Loan and suppliers credit obtained by foreign investors are registered as capital inflows by
National Bank of Ethiopia. Foreign investors who earn profits or dividends from recognized investments
and services are allowed to remit abroad by presenting the required documents or statements.
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 In addition, firms, companies, and business entities engaged in manufacturing or business activity whose
products are sold to external markets generating foreign exchange income are allowed to have access to
external financing and suppliers' credit from abroad to finance imports of input or auxiliary materials
essential for their export product.
2.1. Cleared funds are identified as available for requests to purchase foreign currency

Cleared funds refer to:

 Cash or cheque from same institution
 Cleared funds within a bank account held at same institution.
Any licensed Commercial Bank, operating in Ethiopia may represent or act as an agent of approved credit
card issuers Exchange control directives No. Fxd /06/98 for the use and acceptance of credit cards is issued
by the National Bank of Ethiopia pursuant to the authority vested in it by Article No. 39/2 of the Monetary
and Banking Proclamation No. 83/1994.
For the purpose of this Directive, unless the context requires otherwise:
A. "Credit Card" shall mean an embossed plastic plate with a magnetic strip bearing the logo of major
credit card issuer and identifying a customer with a charge account.
B. "Credit Card holder" shall mean a person whose full name and signature appear on a credit card.
C. "Issuing Company" shall mean a legal entity that issues credit card and by doing so assumes the
liability of the credit card holder.
D. "Establishments" shall mean a business entity authorized by the NBE to accept credit cards in lieu of
payments for goods and services.
Thus authorized banks shall enter on the Exchange Control copy of their accounting ticket the number of the
export permit provided by exporters in order to identify the particular transaction for which payment is
received from abroad. The proceeds of exports shall be identified with the goods and individual Exchange
control, permit number. Where remittance from abroad represents advance payments the accounting ticket
from the recipient local bank shall be clearly marked "Advance Payment for Future Exports". In the absence
of such information authorized banks shall not make payments to the beneficiary exporter nor shall the
Exchange Control copies of accounting tickets be accepted
Establishments Eligible for Accepting Credit Cards
Those establishments that cater to tourist and other foreign nationals are eligible to accept credit cards. This
includes:
 Hotels with three stars and above
 Travel and tour operators
 Duty free shops
 National airlines, and
 Hotels that are certified by the Ethiopian Tourism Commission to have the capacity or meet
the standard to provide services to tourists.
Types of approved Credit Cards
First class credit cards acceptable in Ethiopia shall be;

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  American Express  Euro Card
 Visa Card  Diners Club Card
 Master Card  Cart Blanche
However, the NBE can revise the list of acceptable cards from time to time.
Conditions for Issuance of Credit Card Permit
Without prejudice to the other provisions of these Directives, an establishment may be granted with permit
to accept credit card upon fulfilling the following requirements.
A. Should have a license from the appropriate Government Authority to conduct business at the specified address.
B. Should have trained personnel to examine, authenticate and book credit card sales as well as lodge proper claim
from foreign sources through the agent bank.
C. Must submit agency agreement concluded with issuing companies or banks to the National Bank of Ethiopia for
registration and approval)
D. Have a favorable appraisal report by the Inspection team of NBE.
E. Undertakes the responsibility to submit the credit card vouchers to any licensed commercial bank in Ethiopia to
be sent to the credit card issues or Bank, for collection.
Submission of Application
An establishment which intends to accept credit cards shall fill the form prepared for the purpose and submit
same to the NBE for approval.
Submission of Returns and Inspection
A. Every establishment shall submit reports in prescribed formats giving details of credit card transactions together
with a copy of commercial bank advises to the Exchange control Department on a monthly basis.
B. The NBE may conduct inspection at any time on the premises of the Establishment. The inspection may include
reviewing books of accounts request for information or explanations of the records or transactions and
examination of any records related to credit card sales.
C. Notwithstanding any other provision of law to the contrary, the Establishments are required to maintain records of
the last three consecutive years.
Measures against Non-Compliance with this Directive
Warning
When the NBE finds that an Establishment commits one or several of the following acts;
A. fails to submit monthly reports of credit card transactions to the NBE;
B. Fails to keep proper records of credit cards transactions and
C. Violates any one of the provisions of these directives; it will issue to the establishment a warning in
written.
Cancellation of Credit Cards Permits
For one or several of the following reasons, the NBE may cancel in writing Credit card Permit of any
Establishment if it finds that the Establishment:
A. accepts credit cards without obtaining a permit from NBE,
B. Operates under an expired permit,
C. Fails to forward vouchers of credit cards to the designated Commercial Bank in Ethiopia.
D. Fails to repatriate the proceeds of credit cards in foreign exchange.
E. Fails to submit for three consecutive months reports of credit card transactions to the NBE.
F. Submits false and misleading information.

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2.2. Requests for foreign currency notes are assessed against current stock of currencies
held with currencies note held on site ordered and the customer advised when they
will be available
Commercial banks that are in need of foreign currency cash notes shall be supplied from the stocks of the
National Bank of Ethiopia upon written request. The rates applicable for cash deal and delivery shall be the
linked to the inter-bank forex market directives
Obligation of Commercial Banks
Commercial banks which are licensed to operate in Ethiopia are authorized to accept and process credit
cards documents on behalf of approved establishments and send same for collection to the credit card issuer
of Bank. The Commercial banks shall institute the most expeditious means of settlement with credit card
issuer or Bank.
Mode of Settlement
Upon receipt of payment, the commercial bank shall credit or transfer to the account of the establishment
the equivalent amount in Birr. The commercial bank shall send a copy of such advice to the Exchange
Control Department of NBE for follow-up.
Claims Returned Unpaid
In the event that claims presented by any commercial bank to the credit card issuer or Banks is not honored,
the commercial bank shall immediately inform the client the reason for non-payment, if any, under advice to
the National Bank of Ethiopia.
2.3. Foreign currency notes presented for sale are verified for authenticity according to
organizational procedures.
Authenticity means that the quality of one’s currency is being real or true. In the context of Exchange
control directives for the use and acceptance of credit cards no.FXD/06/98 article NO.1 "Foreign Currency
Cash Notes" means currencies, which are acceptable by banks, forex bureaus and authorized dealers as
listed by the National Bank of Ethiopia from time to time in Foreign Currency Notes Conversion ".
"Conversion" shall mean the arrangements made through a correspondent bank or currency dealers to
process the sales of cash notes through a bid to credit the proceeds into a bank account.
Exchange control directives stated under article 1 no.4.1 that Commercial banks shall take due care to verify
and check the genuinely or free from any Counterfeits of notes purchases using reliable detecting machines
and necessary skills.
"Counterfeits" shall mean a note printed illegally and which doesn't bear all the original characteristics and
security features of legal tender money issued by countries, whose currencies are acceptable under the
Ethiopian banking system.
According to this directive Commercial banks shall register the full identity of the seller while buying the
notes and shall be responsible for the counterfeits in case found in the process of trading and the equivalent
in Birr shall be debited to their reserve account with NBE. Reports of counterfeits and the price at which the
trade is concluded shall be delivered to banks by NBE for their documentations

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 LEARNING GUIDE #3
Conduct the transaction
Foreign currency transactions are transactions denominated in a currency other than the reporting or an
entity’s functional currency.
Types of Transactions
A. Spot transaction involves the purchase of foreign exchange, with delivery and payment between
banks to take place, normally, on the second following business day. The date of settlement is referred
to as the value date.
 A spot transaction requires almost immediate delivery of foreign exchange.
 Spot transactions are the most important single type of transaction (43 % of all transactions).
B. An outright forward transaction (usually called “forward”) requires delivery at a future value date of
a specified amount of one currency for a specified amount of another currency.
 The exchange rate is established at the time of the agreement, but payment and delivery are not
required until maturity.
 Forward exchange rates are usually quoted for value dates of one, two, three, six and twelve months.
 Buying Forward and Selling Forward describe the same transaction (the only difference is the order
in which currencies are referenced.) Actual contracts can be arranged for other lengths.
 Outright forward transactions only account for about 9 % of all foreign exchange transactions.
C. A swap transaction is the simultaneous purchase and sale of a given amount of foreign exchange for
two different value dates. Both purchase and sale are conducted with the same counterparty. Some
different types of swaps are:
a. spot against forward,
b. forward-forward,
c. Non- deliverable forwards (NDF).
The most common type of swap is a spot against forward, where the dealer buys a currency in the spot
market and simultaneously sells the same amount back to the same back in the forward market. Since
this agreement is executed as a single transaction, the dealer incurs no unexpected foreign exchange risk.
Swap transactions account for about 48 % of all foreign exchange transactions
3.1 Conversion of foreign currency amounts is calculated using the organisation's set
procedures and tables or by accessing relevant databases
D. Foreign Currency Exchange Rates
A foreign exchange rate is the price of a foreign currency. An exchange rate is the ratio between a unit of
one currency and the amount of another currency for which that unit can be exchanged at a particular time.
A foreign exchange rate is the price of one currency expressed in terms of another currency. Foreign
currency exchange rates between currencies are established daily by foreign exchange brokers who serve as
agents for individuals or countries wishing to deal in foreign currencies. But in Ethiopia context foreign
currency exchange rates between currencies are established by NBE daily

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In the context of our country exchange rate is an amount of Ethiopian Birr required to purchase one unit of a foreign
currency on a given date. Example If the current date exchange rate between the USD and ETB stated by NBE as
19.710 ETB is need to acquire 1USD , thus Foreign Currency Exchange Rates can be express in one form from
the two below.
 1ETB = O.O5074
 1USD =19.71ETB
I. Exchange Rates or Exchange Quotations
Exchange rate is rate stated or quoted in the media generally refer to interbank rates and usually differ
from exchange rates quoted to you.
A foreign exchange quotation (or quote) is a statement of willingness to buy or sell at an announced rate.
– Some countries maintain an official fixed rate of currency exchange
– The exchange rate can be computed directly or indirectly.
I. Direct Vs Indirect Exchange Rate
 Direct Rate
– A direct rate is a home currency price of a unit of foreign currency
– Number of LC per unit of foreign currency
_ Home currency per unit of foreign currency (FC)
- E.g. a USD/€ quote is 1.6003 – 1.6499
This means a number of USD to acquire one unit of € in the US F.exchange market (€1= $1.6003 up to €1= $1.6499)
DER is the number of local currency units (LCUs) needed to acquire one foreign currency unit (FCU). For
instance from the viewpoint of a U.S. entity:

 Indirect Rate
_ Indirect Exchange Rate (IER) is the reciprocal of the direct exchange rate
_ Indirect Rate is rate of foreign currency price of a unit of home currency
_ Number of foreign currency units per local currency (LC)
_ Foreign currency per unit of Home currency
_ E.g. €/AUD quote of 0.6061 – 0.6249
This means a number of euro (€) to acquire one unit of USD in the US F.Exchange market ($1= 0.609 up to
$1=0.6249

II. Bid & Ask Quotes

In more developed country, foreign currency dealers provide two types of quotes such as Ask Price and
Bid Price, but in Ethiopia NBE provide these quotes to all commercial banks operating in Ethiopia.
Bid rate /Bid Price: Price at which the dealer (banks in case of Ethiopia) is or are willing to buy foreign
currency from you.

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Ask Price/ buying rate: Price at which the dealer (banks in Ethiopia case) is or are willing to sell foreign
currency to you.
 It is always the case that the Ask Price > Bid Price. The difference is the Bid-Ask spread.
 The less traded and more volatile a currency, the greater is the spread.
The spread between bid and ask price sexists for two reasons:
1. Transaction costs and dealers as financial intermediaries and
2. Profits.
Banks act as market makers and realise their profits from the spread through fee charged system.
Bid – Ask Spread is determined as Bid-Ask Spread = (Ask-Bid)/Ask.
Bid-Ask spread used to calculate the fee charged by the bank
Bid = the price at which the bank is willing to buy
Ask = the price at which the bank is willing to sell the currency
Example Consider the direct quote of Bid $ 1.4482/€ and Ask 1.4484/€
% spread 
1.4484  1.4482  100  1.38%
1.4484

3.2 The customer is provided with a copy of the rates used to calculate the currency
conversion
III.Forward Rate Spot Rate
 Spot Rate
 It is a current exchange rate, used for immediate delivery of currencies exchanged, the price at
which a foreign currency can be purchased or sold today.
 The spot rate is the exchange rate for immediate delivery of currencies
 The current rate is defined simply as the spot rate on the entity’s balance sheet date
 Forward Rate
 Rate specifically contracted today for future exchange of currency, the price today at which foreign
currency can be purchased or sold sometime in the future
 The forward rate on a given date is not the same as the spot rate on the same date
 Expectations about the relative value of currencies are built into the forward rate
 Future Rate used in standard contract for future exchange of currency
 Cross rate - exchange rate computed from two other rates. Cross rates can be calculated due to a very simple

form of efficiency in the currency market, known as Triangular Arbitrage. Triangular arbitrage- undertaking

currency transactions to take advantage of discripancies in cross exchange rates of two currencies.
What is a condition that will give rise to a triangular arbitrage?
 taking advantage of interest rate disparities in two countries while covering exchange rate risk.

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  exchange rate risk can be hedged by engaging in a forward exchange contract

 Buy cheap in one int’l market,

 If cross rates differ from one financial center to another, and profit opportunities exist
 sell at a higher price in another
 Role of Available Information
Many currency pairs are only inactively traded, so their exchange rate is determined through their
relationship to a widely traded third currency (generally the USD):
Example. 3. Assume €1=$1.50 €1=22ETB 1ETB= $0.08 and Suppose you want to convert ETB100,000
to Euros. A) What is Cross rate bn ETB & USD & your arbitrage profit?
Solution
Cross rate bn ETB & USD is 1ETB=$0.068
Steps
(1) convert ETB to USD $8,000
(2) convert USD to Euro €5,333
(3) spot market price of
ETB100,000 in Euros €4,545
Arbitrage Profit €788
J. Factors Affecting Determination of exchange rates
Exchange rates change because of a number of economic factors affecting the supply of and demand for a
nation’s currency. Factors causing fluctuations are a nation’s:
• Level of inflation • Stability and process of governance
• Balance of payments • Market sentiment or expectations
• Changes in a country’s interest rate • Economic and political influences
 Investment levels/ inflows/outflows • Import/export of goods and services
 Government controls
 Expectations-about inflation,interest rate,income level ,and government action
 Government influence on exchange Rates:
1) Direct intervention
 by exchanging foreign currency with local currency the government buys or sells local currency(in
the forex market) to manipulate the exchange rate
2) indirect intervention
 adjustment of interest rate -increase interest rate to discourage outflow of funds
 using foreign exchange controls -restriction on the exchange of the currency
 Consequences of Changes in (increase or decrease) exchange rates
Exchange rate fluctuations between the time of purchase/sale and settlement give rise to a foreign exchange
gain or loss on the income statement and it could also strengthen or Weaken once home currency.
– Strengthening of the home currency direct exchange rate decreases, implies:
• Taking less home currency to acquire one FCU
• One the home acquiring more FCUs
– Weakening of the home direct exchange rate increases, implies:
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 • Taking more local currency to acquire one FCU
• One home local currency acquiring fewer FCUs

LEARNING GUIDE #4
Maintain accurate records of transaction
Under maintaining accurate records of transaction that denominated in foreign currency the following points
will discuss.
a) Required vouchers and receipts are completed in accordance with organisation procedures and required
signatures are obtained on relevant documentation
b) Relevant reports are completed & filed in the event of significant cash transactions including relevant
reports where a transaction is considered a possible suspect transaction. Hear significant cash
transactions means transactions involving currency (i.e. coin and paper money of Ethiopia or of a
foreign country) in excess of the equivalent of Birr 200,000 or as determined by legislation.
c) Internal records of foreign currency transactions are updated and maintained in accordance with
organizational procedures
Foreign currency transactions are economic activities denominated in a currency other than the entity’s
recording currency. These include:
 Purchases or sales of goods or services (imports or exports), the prices of which are stated in a foreign
currency
 Loans payable or receivable in a foreign currency
 Purchase or sale of foreign currency forward exchange contracts
 Purchase or sale of foreign currency units
Transactions are normally measured and recorded in terms of the currency in which the reporting entity
prepares its financial statements. This currency is usually the domestic currency of the country in which the
company is domiciled and is called the reporting currency. Assets and liabilities are denominated in a
currency if their amounts are fixed in terms of that currency. In a transaction between a local firm and a
foreign company, the two parties usually negotiate whether the settlement is to be made in LC or in the
domestic currency of the foreign company. If the transaction is to be settled by the payment of a fixed
amount of foreign currency, the local firm measures the receivable or payable in dollars, but the transaction
is denominated in the specified foreign currency. To the foreign company, the transaction is both measured
and denominated in its domestic currency.
 Internal records of foreign currency transactions are updated and maintained in accordance with
organizational procedures
Probably the most common form of foreign currency transaction is the exporting or importing of goods or
services. In each unsettled foreign currency transaction, there are three stages of concern to the accountant.
These stages and the appropriate exchange rate to use in translating accounts denominated in units of
foreign currency (except for forward exchange contracts) are as follows:

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1. At the date the transaction is first recognized in conformity with GAAP. Each asset, liability, revenue,
expense, gain, or loss arising from the transaction is measured and recorded in dollars by multiplying the
units of foreign currency by the current direct exchange rate. (The current direct exchange rate is the spot
rate in effect on a given date.)
2. At each balance sheet date that occurs between the transaction date and the settlement date. Recorded
balances that are denominated in a foreign currency are adjusted using the spot rate in effect at the balance
sheet date and the transaction gain or loss is recognized currently in earnings. This means adjust the payable
or receivable to its equivalent LC, end-of-period value using the current direct exchange rate. Recognize any
exchange gain or loss for the change in rates between the transaction and balance sheet dates.
3. At the settlement date. In the case of a foreign currency payable, a local firm must convert LC. Into foreign
currency units to settle the account, whereas foreign currency units received to settle a foreign currency receivable
will be converted into LC. Although translation is not required, a transaction gain or loss is recognized if the number
of LC paid or received upon conversion does not equal the carrying value of the related payable or receivable. Using
the spot rate to translate foreign currency receivables and payables at each measurement date provides an estimate of
the number of LC to be received or to be paid to settle the account. This also means adjust the foreign currency
payable or receivable for any changes in the exchange rate between the balance sheet date (or transaction date) and
the settlement date, recording any exchange gain or loss as required. Record the settlement of the foreign currency
payable or receivable

Note that both gains and losses are result in adjustments to the receivable or payable, approximating a form
of current value accounting. The increase or decrease in the expected cash flow is generally reported as a
foreign currency transaction gain or loss, sometimes referred to as an exchange gain or loss, in determining
net income for the current period.
A. Importing Transaction
Example1; Assume that a U.S. company acquires €5,000 from bank on January 1, 2011, for use in future
purchases from German companies. The direct exchange rate is $1.20 = €1; thus the company pays the bank
$6,000 for €5,000, as follows:

U.S. dollar equivalent value = Foreign currency units x Direct exchange rate
$6,000 = € 5,000 x $1.20
Required
a. Record the entry show this exchange of currencies on January 1, 2011, for use in future purchases from
German companies
January 1, 20X1
2011
Foreign Currency Units (€) 6,000
Cash 6,000

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b. If July 31 is a balance sheet date and On July 31, 2011, the exchange rate is $1.100 = €1. Show the
adjusting entry that is required in preparing financial statements on July 31,201.

July 1,
31,20X1
2011
Foreign Currency Transaction Loss 500
Foreign Currency Units (€) 500
Example 2; To illustrate an importing transaction, assume that on December 1, 2003, a U.S. firm
purchased 100 units of inventory from a French firm for 500,000 Euros to be paid on March 1, 2004. The
firm's fiscal year-end is December 31. Assume further that the U.S. firm did not engage in any form of
hedging activity. The spot rate for Euros ($/euro) at various times is as follows:
Spot Rate
Transaction date - December 1, 2003 $1.05
Balance sheet date - December 31, 2003 1.08
Settlement date - March 1, 2004 1.07
The U.S. firm would prepare the following journal entry on December 1, 2003:

Dec. 1 Purchases 525,000

Accounts Payable (500,000 Euros x $1.05/euro) 525,000
At the balance sheet date, the accounts payable denominated in foreign currency is adjusted using the
exchange rate (spot rate) in effect at the balance sheet date. The entry is
Dec. 31 Transaction Loss 15,000
Accounts Payable 15,000

Accounts payable valued at 12/31 (500,000 Euros x $1.08/euro) $540,000

Accounts payable valued at 12/1 (500,000 Euros x $1.05/euro) 525,000
Adjustment to accounts payable needed $ 15,000
Or
[500,000 Euros x ($1.08 - $1.05) = $15,000]
If the exchange rate had declined below $1.05, for example to $1.03, the U.S. firm would have recognized a
gain of $10,000 since it would have taken only $515,000 (500,000 Euros x $1.03) to settle the $525,000
recorded liability.
Before the settlement date, the U.S. firm must buy Euros in order to satisfy the liability. With a change in
the exchange rate to $1.07, the firm must pay $535,000 on March 1, 2004, to acquire the 500,000 Euros.
The journal entry to record the settlement is:
Mar. 1 Accounts Payable 540,000
Transaction Gain 5,000
Cash (500,000 Euros x $1.07/euro) 535,000
Over the three-month period, the decision to delay making payment cost the firm $10,000 (the $535,000
cash paid less the original payable amount of $525,000). This net amount was recognized as a loss of
$15,000 in 2003 and a gain of $5,000 in 2004.
Note in the example above that at December 31, the balance sheet date, a transaction loss was recognized on
the open account payable. Such a loss is considered unrealized because the account has not yet been settled

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or closed. When an account payable (or receivable) is settled or closed, a transaction gain or loss on the
settlement is considered realized.
Exporting Transaction
Now assume that the U.S. firm sold 100 units of inventory for 500,000 Euros to a French firm. All other facts are the
same as those for the importing transaction. The journal entries to record this exporting transaction on the books of the
U.S. Company are:
December 1, 2003 - Date of Transaction
Accounts Receivable (500,000 Euros x $1.05) 525,000
Sales 525,000
December 31, 2003 - Balance Sheet Date
Accounts Receivable ($540,000-$525,000) 15,000
Transaction Gain 15,000
The receivable valued at 12/1, 500,000 Euros x $1.08 = $540,000
The receivable valued at 12/31, 500,000 Euros x $1.05 = $525,000
Change in the value of the receivable $ 15,000
March 1, 2004 - Settlement Date
Cash (500,000 Euros x $1.07) 535,000
Transaction Loss 5,000
Accounts Receivable 540,000
A comparison of the entries to record the exporting transaction with those prepared to record an importing
transaction reveals that a movement in the exchange rate has an opposite effect on the company's reported
income. That is, the increase in the exchange rate from $1.05 to $1.08 resulted in a transaction gain in the
case of a foreign currency receivable, whereas a transaction loss was reported in the case of a foreign
currency payable. When the exchange rate decreased from $1.08 to $1.07, a transaction loss was reported on
the exposed receivable, whereas a transaction gain was reported on the exposed payable. Thus, one tool
available to management to hedge a potential loss on a foreign currency receivable is to enter into a
transaction to establish a liability to be settled in the same foreign currency. Similarly, a liability to be
settled in units of a foreign currency can be hedged by entering into a receivable transaction denominated in
the same foreign currency. These relationships are summarized below.
Balance Sheet
Exposed Effect on Income
Account Balance Statement Effect
Reported
Increase in direct exchange rate
Importing transaction Payable Increase Transaction loss
Exporting transaction Receivable Increase Transaction gain
Decrease in direct exchange rate
Importing transaction Payable Decrease Transaction gain
Exporting transaction Receivable Decrease Transaction loss
How should a transaction gain or loss be reported? In the previous examples, the dollar amount recorded in
the Sales account and the Purchases account was determined by the exchange rate prevailing at the
transaction date. Adjustments to the foreign currency denominated receivable or payable were recorded
directly to transaction gain or loss. Under this approach, referred to as the two- transaction approach, the
sale or purchase is viewed as a transaction separate and distinct from the financing arrangement. Thus, the
transaction gain or loss does not result from an operating decision to buy or sell goods or services in a
foreign market, but from a financial decision to delay the payment or receipt of foreign currency and not to
hedge the exposed receivable or payable against possible unfavorable currency rate changes.
An alternative view that was rejected by the FASB considers the initial transaction and settlement to be one
transaction. Supporters of this method contend that the initial transaction is incomplete and the amounts
recorded are estimates until such time as the total sacrifice from the purchase (units of domestic currency
paid) or the total benefits from the sale (units of domestic currency received) are known. Under this view,
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transaction gains or losses should be accounted for as an adjustment to the cost of the asset purchased or to
the revenue recorded in a sales transaction. There is an obvious implementation problem with this method
when the sale or purchase is recorded in one fiscal period and the receipt or payment occurs in another
period.
Example
On 12/5/2009 American firm sells goods to German company for 1 million Euros. German customer has 30
days to pay. Because America firm keeps its books in US$, it must restate the sale and receivable into US$.
The (indirect) spot rate is $1.21 per euro on 12/5/2009.
a. Pass the journal entry that should be recorded At 12/5/2009:
b. At 12/31/2009 the new spot rate is $1.24 per euro. Does American firm have a foreign exchange gain or loss?
c. On 1/2/2010 the transaction is settled at a spot rate of $1.23. Does American firm have a foreign exchange gain
or loss now?
d. Show journal entry
a) A real or loss or gain and is calculate from 12/31/09.
b) When the cash is actually received:
e. Show the summary of the Sale Example and foreign currency exposure :
Solution
a. Pass the journal entry that should be recorded At 12/5/2009:
AR …………………………………………….. $1,210,000
Sales …………………………………………… $1,210,000
(Note: we’re ignoring the Inventory and COGS portion of the entry)
b. At 12/31/2009 the new spot rate is $1.24 per euro. Does American firm have a foreign exchange gain or
loss?
According to US and IASC GAAP, record unrealized gain/loss at 12/31/2009. Note this is a “paper” gain.
A/R ------------------------------- $30,000
Foreign Exch Gain ------------------- $30,000
c. 1/2/2010 the transaction is settled at a spot rate of $1.23. Does American firm have a foreign exchange
gain or loss now?
Note this is a “real” loss or gain and is calc from 12/31/09.
Foreign Exch Loss ----------------- $10,000
A/R ------------------------ $10,000
When the cash is actually received:
Cash ------------------$1,230,000
A/R -----------------------------$1,230,000
d. Show the summary of the Sale Example and foreign currency exposure:
2009 2010
Foreign Exchange Gain (loss) $30,000 $(10,000)
Recall exchange rates: euro first appreciates, then depreciates
12/05/09 $1.21 per euro
12/31/09 $1.24 per euro => US$ weakens, FC strengthens
01/02/10 $1.23 per euro => US$ strengthens, FC weakens

 Thus foreign currency exposure is as follows:

Transaction Exposure FC Appreciates FC Depreciates
Export Sale Asset Gain Loss
Import Purchase Liability Loss Gain

 Indirect Rate - An indirect rate is a foreign currency price of a unit of home currency. Number of
foreign currency units per US$
 Bid rate : buying rate
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 Buying rate: selling rate
 Direct Rate – A direct rate is a home currency price of a unit of foreign currency. Number of US$s per
unit of foreign currency
 Spot Rate– Current exchange rate, the exchange rate for immediate delivery of currencies exchanged,
the price at which a foreign currency can be purchased or sold today.
 Forward Rate – Rate specifically contracted today for future exchange of currency, the price today at
which foreign currency can be purchased or sold sometime in the future
 Future Rate – Rate used in standard contract for future exchange of currency
 Spread – difference between current and forward rate. Can be a premium or discount.
 Forward Contract –Contract between 2 parties to buy or sell currency at specified rate at specified date

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