Under this accounting method, exchange gains and losses that result from fluctuations in exchange rates are considered unrealized until the transactions are settled.
At each balance sheet date, you revalue outstanding balances that are denominated in foreign currencies. Any exchange gains or losses calculated during revaluation are posted to unrealized exchange gain and unrealized exchange loss accounts, and the balance sheet is stated using current rates.
However, because exchange rate fluctuations are considered temporary, unrealized gains or losses are not taken into net income, and they are reversed in the next period.
When transactions are settled, exchange gains and losses are considered permanent, and are taken into income in that period.