FAR: 16.2

Translation Adjustments

foreign currency translation adjustments for a foreign operation (translation gains and losses) are reported in OCI. A pro rata portion of the accumulated translation adjustment attributable to an investment in a foreign entity is recognized in measuring the gain or loss on the sale.

Transaction gain (loss)

results from a change in exchange rates b/w the functional currency and the currency in which the transaction is denominated. It is the change in functional currency cash flows 1. Actually realized on settlement and 2. Expected on unsettled transactions

Foreign currency transaction gain or loss

results from a change in the exchange rate b/w the date the transaction was recognized, the date of the financial statements, and the date the transaction is settled. Is included in the income statement in the period the exchange rate changes. If the monetary aspect of the transaction has not yet occurred at the end of the period, monetary items (accounts payable and accounts receivable) are presented at the year-end exchange.

Foreign currency

Is any currency other than the entity's functional currency

Foreign currency transactions - initial measurement

Must be in the reporting entity's functional currency. The exchange rate used is the rate in effect on the date the transaction was initially recognized

Tax effects of changes in exchange rates: interperiod tax allocations

Necessary when transaction gains and losses result in temporary differences. The tax consequences of translation adjustments are accounted for in the same way as temporary differences.

Remeasurement: nonmonetary items

Nonmonetary balance sheet items and related revenue, expense, gain, and loss amounts are remeasured at the historical rate. Examples are: 1. marketable securities carried at cost 2. Inventories carried at cost 3. COGS 4. Prepaid expenses 5. PPE 6. Depreciation 7. Intangible assets 8. amortization of intangible assets 9. deferred income 10. CS 11. PS carried at issuance price 12. NCI

Remeasurement: gain or loss

On remeasurement of monetary assets and liabilities is recognized in current earnings as part of continuing operations. this accounting treatment was adopted b/c gains or losses on remeasurement affect functional currency cash flows.

Remeasurement: monetary items

Remeasured at the current rate. Examples are: 1. Receivables 2. Payables 3. Inventories carried at market 4. Marketable securities carried at fair value

Functional currency

The currency of the primary economic environment in which the entity operates. Normally that environment is the one in which it primarily generates and expends cash. Ex. the functional currency of a foreign subsidiary is more likely to be the parent's currency if its cash flows directly and currently affect the parent's cash flows.

Transaction date

The date when a transaction is recorded under GAAP.

Functional currency transaction approach (current rate method)

The method used to convert foreign currency amounts into units of the reporting currency. Appropriate for use in accounting for and reporting the financial results and relationships of foreign subsidiaries in consolidated statements. It: 1. Identifies the functional currency of the entity (the currency of the primary economic environment in which the foreign entity operates) 2. Measures all elements of the statements in the function currency and 3. Uses a current exchange rate for translation from the function currency to the reporting currency. Assets and liabilities are translated at the exchange rate at fiscal year end. Revenues, expenses, gains, and losses are translated at the rate in effect when they were recognized. However, a weighted-average rate for the period may be used for these items.

Spot rate

The rate for immediate exchange of currencies

Current exchange rate

The rate used for currency conversion

Foreign currency issues

The reporting currency is the currency in which an entity prepares its financial statements.

Foreign currency transactions: terms

Are stated in a currency different from the entity's functional currency. Ex. if an entity whose functional currency is the U.S. dollar purchases inventory on credit from a German entity, payment is to be in euros.

Remeasurement

If the books of a foreign entity are maintained in a currency not the functional currency, foreign currency amounts must be remeasured into the function currency using the temporal method. They are then translated into the reporting currency using the current-rate method.

Financial statements of a foreign entity

In a highly inflationary economy, are remeasured into reporting currency using the temporal method. Thus, the reporting currency is treated as if it were the function currency.

Tax effects of changes in exchange rates: intraperiod tax allocation

Also required. Ex. taxes related to transaction gains and losses and translation adjustments reported in OCI should be allocated to those items.

Foreign currency transactions

Are fixed in a currency other than the functional currency. Result when an entity: 1. Buys or sells on credit; 2. Borrows or lends; 3. Is a party to a derivative instrument; or 4. For other reasons, acquires or disposes of assets, or incurs or settles liabilities, fixed in a foreign currency.

Transaction gains and losses excluded from earnings

1. Transactions that are designated and effective as economic hedges of a net investment in a foreign entity 2. Transactions that are in effect long-term investments in foreign entities to be consolidated, combined, or accounted for by the equity method. Reported in the same way as translation adjustments in OCI

Foreign currency translation

Expresses in the reporting currency amounts that are 1) denominated in fixed in units of a different currency or 2) measured in a different currency. Ex. a U.S. entity may have a liability denominated in (fixed in) euros that it measures in U.S. dollars. A consolidated entity may consist of separate entities operating in different economic and currency environments. Translation is necessary in these circumstances so that consolidated amounts are presented in one currency.