Everything so far has been translation exposure: a foreign operation's own statements, expressed in another currency. Transaction exposure is narrower and more dangerous. It is what happens when an entity has a receivable, a payable or a borrowing denominated in a currency other than its own functional currency.
How is transaction exposure accounted for, with an example?
One sentence covers it. At each reporting date, foreign-currency monetary items are retranslated at the closing rate, and the difference goes to profit or loss. Non-monetary items measured at historical cost aren't retranslated. There is no reserve, no recycling and no functional-currency judgement to make. The item is in the wrong currency and the profit statement absorbs the movement every period until it is settled.
In a falling-rupee year this line dominates Indian corporate results. It's worth working end to end, because the interest interacts with the principal in a way that catches people out.
Konkan Chemicals Ltd (synthetic) is a rupee-functional Indian speciality chemicals maker. On 1 October 2024 it drew a $40.0 million five-year external commercial borrowing at 6%, interest payable annually each 30 September. The rupee ran ₹83.50 on drawdown, ₹85.20 at the 31 March 2025 year end, ₹87.60 on 30 September 2025, and ₹89.40 at the 31 March 2026 year end. Average rates were ₹84.30 for the second half of FY25 and ₹88.10 for the second half of FY26.
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In FY25 the company holds the loan for six months. The principal is recorded at 40.0 × 83.50 = ₹334.000 crore and retranslated to 40.0 × 85.20 = ₹340.800 crore, an exchange loss of ₹6.800 crore. Six months of interest accrues, $1.2 million, expensed at the average rate for ₹10.116 crore. It's carried as a liability retranslated to ₹10.224 crore, a further exchange loss of ₹0.108 crore. FY25 total exchange loss: ₹6.908 crore.
FY26 is fiddlier. It has three separate movements, and you have to find each one.
The coupon of $2.4 million is paid on 30 September 2025 at ₹87.60, costing ₹21.024 crore of cash. Half of that had been accrued at ₹85.20, so settling it produces an exchange loss of 1.2 × (87.60 − 85.20) = ₹0.288 crore. The other half, the interest for April to September 2025, is both accrued and paid inside the half-year. It's recognised at ₹87.60, giving ₹10.512 crore of interest expense. From October to March a further $1.2 million accrues at the average of ₹88.10, giving ₹10.572 crore. Retranslated at ₹89.40 it becomes ₹10.728 crore, a loss of ₹0.156 crore. The principal moves from ₹340.800 crore to 40.0 × 89.40 = ₹357.600 crore, a loss of ₹16.800 crore.
FY26 exchange loss: 16.800 + 0.288 + 0.156 = ₹17.244 crore. FY26 interest expense: 10.512 + 10.572 = ₹21.084 crore. Add up both years and the exchange loss comes to ₹24.152 crore, on a loan whose principal hasn't changed by a single dollar.
Konkan's profit before tax and before any of this would have been ₹210.000 crore. After the FY26 exchange loss it's ₹192.756 crore, a fall of 8.2114%. Every rupee of that decline is an unrealised movement on a loan that won't be repaid for three more years.
Can part of the loss be moved out of profit?
There's a partial escape, and it's the net investment hedge designation. If Konkan's Indian operations generate dollar revenue, or if the group has a dollar-functional subsidiary whose net assets the loan can hedge, part of the principal can be designated. Designate $24 million of the principal against a net investment, and 24 ÷ 40 of the FY26 principal loss, ₹10.080 crore, goes to other comprehensive income. What remains in profit is ₹7.164 crore. Profit before tax is ₹202.836 crore, and the fall shrinks from 8.2114% to 3.4114%.
Read that carefully before you decide it's good news. The company's obligation hasn't changed. The designation moved ₹10.080 crore of a real loss out of the income statement and into a reserve, and it did so legitimately, because there is a matching net investment on the other side. Your job is to know that the number moved, and where it went.
What should you check when reading the accounts?
Three habits close this out. Find the exchange difference in the finance-cost note, and don't trust a summary line. Indian filers routinely present exchange losses inside finance costs and exchange gains in other income. Ask whether the exposure is hedged with instruments or merely designated, since a designation changes the reporting and a forward changes the cash. And separate the interest from the exchange movement before you draw any conclusion about the cost of the borrowing. The ₹21.084 crore of interest is a cost the company chose and the ₹17.244 crore of exchange loss is a risk it accepted.