Exchange rate
In one sentenceThe price of one currency against another. Foreign currency transactions are recorded at it, and a change in it between the invoice date and the payment date produces an exchange gain or loss.
Simply put
When you buy on credit in a foreign currency, you record the invoice in riyals at that day's exchange rate. If the rate changes before payment, the difference is a foreign exchange gain or loss in the income statement.
The riyal is pegged to the dollar at 3.75, so differences in dollars are small, and they are larger in other currencies.
Worked example
An equipment importer bought goods for 10,000 euros on credit. The rate was 4.10 SAR per euro on the invoice date and 4.20 on the payment date (rates for illustration).
Invoice value on the recording date10,000 × 4.10 = 41,000 SAR
Paid on the payment date10,000 × 4.20 = 42,000 SAR
Difference42,000 − 41,000 = 1,000 SAR
Foreign exchange loss1,000 SAR
Formula: Exchange difference = amount in foreign currency × (payment rate − recording rate)
Don't confuse it with
Bank chargesA bank charge is a fee the bank takes, while an exchange difference comes from the change in the rate, not from the bank.