RJ 122 foreign currency: functional currency, translation and exchange differences
A purchase in dollars, a customer paying in pounds or a foreign subsidiary: here is how you convert foreign-currency amounts into euros in Dutch annual accounts and where the exchange difference goes.
The short answer
RJ 122 governs how you process foreign-currency transactions and foreign participating interests in euros. You book a transaction at the rate on the transaction date. At the balance sheet date you translate monetary items at the closing rate; the exchange difference goes to the profit and loss account. You translate a foreign participating interest through a translation reserve. Micro and small entities follow RJk A2.4.
Updated 30 October 2026
Key facts
| Legal basis | art. 2:384(5) DCC (explaining accounting policies), art. 2:362(7) DCC (foreign currency), art. 2:389(8) DCC (translation reserve) |
| Version | RJ 122 (version 2024) applies from financial year 2025, unchanged in 2026 and 2027 |
| Micro and small | RJk A2.4 for transactions; for foreign operations and a different presentation currency it refers to RJ 122 |
| Monetary items | Closing rate on the balance sheet date, exchange difference in profit or loss |
| Non-monetary items at cost | Historical rate; no retranslation |
What the law requires
The accounting policies for valuing the assets and liabilities and for determining the result are set out for each of the items. The policies for translating amounts denominated in foreign currency are set out; it is also stated how exchange differences have been recognised.
So the law does not say how you translate, only that you explain it. RJ 122 and, for micro and small entities, RJk A2.4 fill in the method. RJ 122 also covers what you do when a currency is not exchangeable: you then estimate the rate that would apply at that moment (RJ 122.114).
Functional, presentation and local currency
The functional currency is the currency of the economic environment in which the entity operates (RJ 122.105 to 122.110; RJk A2.403). What matters most is the currency in which selling prices and the costs of staff and materials are mainly denominated. Next you look at the currency in which the entity raises financing and holds cash. For almost every Dutch BV that is the euro.
The local currency is that of the country of the registered office, so for a Dutch BV the euro. The presentation currency is the currency in which the annual accounts are presented. A currency other than the euro is allowed if the activities or the international group justify it (art. 2:362(7) DCC); see also annual accounts in dollars. The functional currency only changes when the underlying reality changes, and then prospectively, from the date of the change (RJ 122.214 to 122.216).
Transactions in foreign currency
| Moment | What you do | Source |
|---|---|---|
| Transaction date | Translate at the rate of that day; if rates are stable, a weekly or monthly average is allowed | RJ 122.201 and 122.202; RJk A2.405 |
| Balance sheet date, monetary items | Translate bank balances, receivables, liabilities and provisions settled in cash at the closing rate | RJ 122.203; RJk A2.406 |
| Balance sheet date, non-monetary items at cost | Inventory, machinery, prepayments and goodwill keep the rate of the transaction date | RJ 122.203; RJk A2.406 |
| Balance sheet date, non-monetary items at current value | Translate at the rate on the date of the valuation | RJ 122.203; RJk A2.406 |
| Exchange difference on monetary items | In the profit and loss account of the year in which it arises | RJ 122.207; RJk A2.407 |
| Exchange difference on non-monetary items at current value | Follows the change in value: through equity if the change in value is recognised there | RJ 122.209; RJk A2.407 |
Foreign participating interests and branches
If the entity has a subsidiary, participating interest or branch with a different functional currency, you translate its figures before including them in the consolidation or the net asset value (RJ 122.302 and 122.307):
- assets and liabilities at the closing rate on each balance sheet date;
- income and expenses at the rates of the transaction dates, or an average if the rate does not fluctuate strongly;
- the difference goes to the translation reserve, a legal reserve that cannot be distributed and may become negative (art. 2:389(8) DCC; art. 2:373(4) DCC);
- if you sell the participating interest, the accumulated difference is still released through profit or loss (RJ 122.311).
Increases or decreases in the value of participating interests resulting from translating the capital invested in them and the result from the currency of the participating interest into the currency in which the legal entity prepares its annual accounts are credited or charged to a translation reserve. Exchange differences on loans taken out to hedge the currency risk of foreign participating interests are likewise credited or charged to this reserve. The reserve may have a negative balance.
A long-term loan to the foreign subsidiary that is not repaid in the short term effectively forms part of the investment. The exchange difference on it goes to the reserve at the parent and to profit or loss at the subsidiary (RJ 122.211 to 122.213). Under hyperinflation, at least 100% over three years, separate rules apply (RJ 122.312).
Case: a machine in dollars and a subsidiary in England
Precisietechniek Arends BV (fictitious, small, functional currency euro) buys a machine in the United States on 15 October 2026 for $ 110.000. Rate that day: € 1 = $ 1,10.
| Date | Event | Rate € 1 = | Amount in euros | Exchange result |
|---|---|---|---|---|
| 15-10-2026 | Machine and payable booked | $ 1,10 | € 100.000 | – |
| 15-11-2026 | Half paid: $ 55.000 | $ 1,12 | € 49.107 | gain € 893 (booked was € 50.000) |
| 31-12-2026 | Remaining payable $ 55.000 translated | $ 1,08 | € 50.926 | loss € 926 |
On balance, Arends books an exchange loss of € 33 in 2026. The machine stays at € 100.000, the historical rate, and is depreciated on that amount. The 2027 exchange difference on the remaining payable belongs to 2027.
Arends also has an English subsidiary, Arends UK Ltd, which it values at net asset value. Equity on 1 January 2026: £ 400.000 at £ 0,85 per euro = € 470.588. Profit 2026: £ 50.000 at an average of £ 0,86 = € 58.140. Equity on 31 December 2026: £ 450.000 at the closing rate of £ 0,83 = € 542.169.
Translation difference: € 542.169 − € 470.588 − € 58.140 = € 13.441, positive because the pound strengthened. That amount goes directly to the translation reserve and not through the profit and loss account. The result from the participating interest is € 58.140.
What each class explains in the notes
| Class | Notes |
|---|---|
| Micro | No notes (art. 2:395a(6) DCC); the translation itself still follows the RJk (M1.301). |
| Small | The policies for translation and the recognition of exchange differences, separately for the balance sheet and the profit and loss account, must be included; so must a change of presentation currency (RJk A2.409). The reason for a different presentation currency: may be considered (A2.410). |
| Medium-sized and large | Policies by type (transactions, foreign operations, goodwill from foreign acquisitions), the amount of exchange differences in profit or loss, the movement in the translation reserve and the reasons for a different or changed currency (RJ 122.502 to 122.505). |
Common mistakes
- Retranslating inventory or machinery in foreign currency at the new rate every year. Only monetary items go to the closing rate.
- Booking the translation difference on a foreign participating interest through the profit and loss account.
- Treating a prepayment to a foreign supplier as a monetary item. It delivers goods, not money, and keeps the old rate.
- Distributing the translation reserve. It is a legal reserve.
How it works in Jaarrekening.io
If you have items in foreign currency, Jaarrekening.io asks how you translate and where the exchange differences are recognised, explaining the rules from RJk A2.405 to A2.407. Those answers go into the accounting policies of the notes. The rates and the translation itself come from your bookkeeping.
Sources
- Art. 2:384 DCC: accounting policies, including translation of foreign currency (wetten.overheid.nl, in Dutch)
- Art. 2:362 DCC: annual accounts in a foreign currency (wetten.overheid.nl, in Dutch)
- Art. 2:389 DCC: translation reserve (wetten.overheid.nl, in Dutch)
- Art. 2:373 DCC: legal reserves (wetten.overheid.nl, in Dutch)
- Financial Reporting Council (Raad voor de Jaarverslaggeving): Guidelines (rjnet.nl)
Frequently asked questions
Which rate do I use to translate a foreign currency at the balance sheet date?
Monetary items, such as bank accounts, receivables and liabilities in foreign currency, are translated at the closing rate on the balance sheet date. Non-monetary items carried at cost, such as inventory and machinery, keep the rate of the transaction date. Non-monetary items carried at current value are translated at the rate on the date of the valuation (RJ 122.203, RJk A2.406).
Where do I book exchange differences?
Exchange differences on monetary items go to the profit and loss account of the year in which they arise. Translation differences on the equity of a foreign participating interest go directly to the translation reserve within equity (art. 2:389(8) DCC). When the participating interest is sold, the accumulated amount is still released through profit or loss.
What is the functional currency?
The currency of the economic environment in which the entity operates. What matters most is the currency in which selling prices and costs are mainly denominated; next, the currency in which financing is raised and cash is held (RJ 122.106 and 122.107). For most Dutch BVs that is the euro.
Can the translation reserve be distributed?
No. The translation reserve is a legal reserve (art. 2:373(4) DCC) and does not count as freely distributable equity. Under art. 2:389(8) DCC it can have a negative balance.
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