How to account for foreign exchange gains and losses in the UAE

A realised exchange difference arises when a foreign currency invoice or bill is settled at a different rate from the one used to record it. An unrealised difference arises when an open balance, such as a EUR payable at month-end, is retranslated at the closing rate as IAS 21 requires for monetary items.

Non-monetary items, such as inventory or fixed assets bought in a foreign currency, are not retranslated. Their AED cost is fixed at the rate on the transaction date.

On 5 September an importer records a bill for EUR 20,000 at 4.05, AED 81,000. At 30 September the rate is 4.10, so the open payable is retranslated to AED 82,000: debit unrealised exchange loss AED 1,000; credit accounts payable AED 1,000.

The importer pays on 20 October at 4.08, AED 81,600. The payable stands at AED 82,000, so the settlement produces a realised gain of AED 400 against the September position. Over the whole life of the bill, the net loss is AED 600: the business paid AED 81,600 for something recorded at AED 81,000.

• Record at the transaction-date rate
• Retranslate open monetary balances at each month-end
• Record the realised difference on settlement
• Keep both in separate accounts, outside sales and cost of sales

For VAT, Article 69 of the VAT Decree-Law requires foreign currency amounts to be converted into AED at the rate approved by the Central Bank on the date of supply. That figure is fixed for VAT, whatever happens to the rate later. Exchange gains and losses on settlement do not change the VAT on the original invoice or bill.

Our view: set your system to use Central Bank rates for invoice and bill translation, so the accounting and the VAT figures start from the same number and you have one fewer reconciling item.

Taxable income under the Corporate Tax Law starts from accounting income (Article 20), so exchange gains and losses in the financial statements generally feed into the computation. Article 20 also allows a taxable person using accrual accounting to elect to recognise certain gains and losses on a realisation basis, subject to conditions set by the Minister. That election can affect when unrealised differences are taxed. Discuss it with your tax agent before your first return, because elections can be difficult to change.

The dirham is pegged to the US dollar, so USD balances produce very small differences, mostly from bank spreads. EUR, GBP, INR and other currencies move, sometimes sharply. A business with significant non-USD exposure should review it monthly: open receivables and payables by currency, and the effect of a 5% move. Simple steps, such as matching currency inflows with outflows or agreeing prices in USD, often reduce risk more than hedging products.

HelloBooks records invoices and bills in AED, USD, EUR, GBP, INR and other currencies, keeps realised and unrealised exchange gains and losses in their own accounts, and retranslates open balances at period end. When you upload a statement from a foreign currency account, the AI agent matches the payment and posts the realised difference automatically for your review.

Ask “what was our net FX loss last quarter and which currencies caused it?” and the agent breaks it down. Your accountant checks the month-end rates and approves the revaluation before closing.