Translation of Foreign Currency Financial Statements

Chapter Ten: Translation of Foreign Currency Financial Statements

Learning Objectives: to explain the nuances and define the reasoning and limitations behind the current rate and the temporal methods; describe guidelines for foreign currency financial statements; translate a foreign operation’s financial statements to its parent’s reporting currency; consolidate the financial statements of a foreign subsidiary into its parent company’s.

1. Treatments for Translation Adjustment.

1. Selection of appropriate method.
2. Deciding where to report the resulting translation adjustment in the consolidated financial statements.

1. Functional Currency Terms.

1. Remeasurement – used to translate a foreign operation’s functional currency, if they use U.S. dollars; is done using the temporal method.
2. Translation Adjustment – used to translate a foreign operation’s functional currency, if they use the currency of the country wherein they operate; is done using the current rate method.

1. Highly Inflationary Economics – occurs when its cumulative three-year inflation exceeds 100%; with compounding, it is equal to an average of 26% per year for three consecutive years.
2. Current Rate Method – all revenues and expenses are translated at the exchange rate in effect at the date when the accounting was recognized.
3. Temporal Method – if the sub’s functional currency is the U.S. dollar, any balances denominated in the local currency must be remeasured.
4. Nonlocal Currency Balances – If any accounts of the foreign subsidiary are denominated in a currency other than the local currency, they would have to be restated into the local currency first.
5. Hedging Balance Sheet Exposure – when the U.S. dollar is the functional currency, or when a foreign operation is located in a highly inflationary economy, remeasurement gains and losses are reported in the consolidated income statement.
6. Translation Adjustment with Foreign Subsidiary – if the foreign currency is the functional currency, the excess amounts are translated using the current exchange rate accompanied by a translation adjustment. Neither parent company nor subsidiary records the translation adjustment related to the excess, and it should be entered in the consolidation worksheet.