Exchange differences in a grant project: which rate to use

Why exchange differences always appear in a grant project

The donor transfers funds in euro or dollars, the organisation spends them in hryvnia, and time passes between the day the tranche arrives and the day an invoice is paid. The rate moves in between, and a difference appears in the books that the project budget never planned for. Grant agreements usually give this half a sentence or nothing at all, so every organisation meets the question for the first time and often answers it wrongly.

Below: when the difference arises, which rate Ukrainian accounting uses and which rate the donor uses, who absorbs the gap, and what we check during an audit.

Three moments when the difference arises

• Tranche receipt. Currency lands on the FX account at the National Bank of Ukraine rate for the date of crediting. If part of it is sold on the interbank market, the gap between the NBU rate and the sale rate is not an exchange difference but the result of a currency sale, and it must be shown separately.
• Spending. Payment to a supplier goes out in hryvnia at the rate of the payment date. The rate on that date usually differs from the rate on the tranche date, and this is where most differences come from.
• Balance at the reporting date. The FX balance is revalued at each month end and at the balance sheet date. This is required by Ukrainian accounting standard 21 and applies regardless of what the grant agreement says.

Which rate Ukrainian accounting uses

One rule applies: the official NBU rate on the transaction date, and for balances the NBU rate at the balance sheet date. Monetary items, meaning cash and receivables or payables that will settle in cash, are revalued. Non-monetary items such as prepaid services or purchased equipment stay at the rate of initial recognition and are not revalued.

This distinction between monetary and non-monetary items produces half of the errors we see: the organisation revalues a prepayment to a supplier when it should not.

Which rate the donor uses

There is no single rule here, so read the agreement. In practice we meet four approaches:

• Rate of the actual transaction date. The most common option, matches Ukrainian accounting, no friction.
• Fixed project rate. The donor locks a rate at signature or at the first tranche, and the whole report is converted at it. The gap against the actual rate becomes a separate line.
• Monthly average rate. Used by some European programmes. The report then needs a parallel calculation.
• The organisation’s own conversion rate. The donor accepts the rate at which currency was actually sold, but then a bank statement is required for every conversion.

Important: Ukrainian books follow the NBU rate in any case. If the donor requires a different rate, the donor report is prepared as a separate calculation, not instead of the accounting records.

Who absorbs the difference

If the rate moves in the organisation’s favour, extra hryvnia appear in the project. Most donors treat them as project funds: they may be spent only on budget lines and only within the project period, and any unused balance is returned with the rest.

If the rate moves against the project, the hryvnia budget shrinks. Donors normally do not compensate this with an extra tranche. Two options remain: revise the budget and reduce the scope of activities, or cover the gap from own or co-financed funds. Both require written donor approval before the money is spent, not in the final report.

What the auditor checks

• Whether the rate in the entry matches the official NBU rate for that date. Tested on a sample, but on every large payment.
• Whether FX balances are revalued at each reporting date and whether non-monetary items were revalued by mistake.
• Whether the result of currency sales is separated from exchange differences. These are different things and donors ask about them separately.
• Whether exchange gains are disclosed in the donor report and how the organisation used them.
• Whether written donor approval exists if the budget was revised because of the rate.

Five errors we see most often

• The whole report converted at the rate of the report date. It looks tidy but matches neither the books nor most agreements. The donor asks for a rework.
• Exchange gains treated as the organisation’s own money. The most expensive error: the donor requests repayment.
• Supplier prepayment revalued. A non-monetary item, it must not be revalued.
• Exchange difference booked to project administrative costs. It is not an administrative cost and does not count towards the admin cost ceiling.
• No bank statements for conversions. Without them the auditor cannot confirm the rate and the cost becomes unsupported.

What to do before the tranche arrives

1. Find the clause on the exchange rate in the agreement. If there is none, write to the donor and get the answer in writing.
2. Fix in the accounting policy how the organisation calculates exchange differences by project.
3. Open a separate analytical account per project so that differences do not mix between grants.
4. File the bank statement for every conversion immediately, instead of collecting them before the audit.

If you need a review

We have audited international technical assistance projects since 2000 and see exchange differences in every second report. Tell us the donor and the period, and we will say what to look at first and which documents to prepare. A proposal follows once we have reviewed the assignment.