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What is Trade date accounting?

When an asset is purchased, in trade date accounting, the asset is recognized and brought into the books of account on the date of trade and a corresponding liability is established. The liability is knocked off when the settlement of the liability happens. When the asset purchased is in a foreign currency, it leads to a little more complication. The asset is recognized in the functional currency in which the reporting is made, on the basis of the foreign exchange rate that prevails as on the date of trade. The corresponding liability is also created equivalent to the asset purchased. However when the settlement is done after a few days, the foreign exchange rate is likely to be different from the rate at which the asset was converted. Hence when recording the settlement event in the functional currency, the liability would appear to be settled in the functional currency as either over paid or under paid. This is dealt with by passing appropriate FX translation entry known as ‘Consummated FX translation entry’.

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