Foreign Currency Translation Method
Xiaoqin Xu ACCT 6075
In accounting, foreign currency translation is an important part when measuring a foreign subsidiary’s financial statements. Foreign companies keep the accounting records in the local currencies. In order to present the financial statements in the same reporting currency as for the parent company, the domestic firm must translate the foreign subsidiary’s financial statements from the foreign currency to the domestic currency. This is known as foreign currency translation. Consolidating financial statements between foreign subsidiaries and the parent companies would not be possible, if there is no foreign currency ...view middle of the document...
Temporal rate method is required by SFAS #8 (FASB, 1975). Unlike the current rate method, which uses just one exchange rate for all the assets and liabilities, the temporary rate method uses different rates. Assets and liabilities that are taken at current values are translated using the current exchange rates and items taken at historical values are translated at the historical exchange rates.
When a foreign subsidiary is strongly integrated with the parent firm, the company uses the monetary-nonmonetary translation method. Like the temporary rate method, monetary-nonmonetary method also treats assets and liabilities differently. When translating monetary assets and liabilities like cash, account receivable and account payable, the current exchange rate should be used. When translating nonmonetary items like inventory, fixed assets and common stock, the historical rate should be used.
There are some similarities and differences between the US GAAP and IFRS on this topic. Here are some details about the comparison.
IFRS US GAAP
(IAS 21,IAS 29) (ASC Topic 830)
A company measures its balance sheet items and the income statement items in its functional currency, which is the currency used in the primary economic environment.
If transactions are not made in an entity’s functional currency, they are foreign currency transactions. Then some translation differences arising, which are generally recorded in profit or loss.
If the functional currency of a foreign subsidiary is the hyperinflationary economic currency, then the company will make some purchasing adjustments to its financial statements before translation into a different presentation currency; the adjustments are made according to the closing rate at the end of the current period. However, if the presentation currency is not the hyperinflationary economic currency, then there will be no restated comparative amounts.
A company may present its financial statements in a currency other than its functional currency, it is called presentation currency. A company that translates its financial statements into a presentation currency other than its functional currency uses the same method as for translating the financial statements of a foreign company.
If some certain disclosures are made, A company may show supplementary financial information in a currency other than its presentation currency.
IAS 21 permits a stand-alone company preparing financial statements in accordance with IAS 27 to present its financial statements in any currency. If the company’s presentation currency is different from its functional currency, the results and financial position are also translated into the presentation currency in accordance with IAS 21.38-.50. Like IFRS, a company measures its balance sheet items and the income statement items in its functional currency, which is the currency used in the primary economic environment. However, the indicators usually determine the functional currency...