The document discusses foreign currency translation and accounting for currency exchange rate differences. It defines foreign currency translation as the process of converting a foreign subsidiary's financial statements to the parent company's presentation currency. The key aspects covered include determining the functional and reporting currencies, translating financial statements at historical or current exchange rates, and recognizing resulting gains and losses. Rules for converting trial balances from foreign to reporting currencies using historical or average rates are also outlined.
2. BACKGROUND
Global cooperation being conducted in the absence of
currency or common unit of accounts have created a
need of an accounting that deals with CURRENCY
TRANSLATION.
They are required to prepare consolidated financial
statement in which the results of both domestic & foreign
cooperation are to be incorporated, face a specific
3. What Is Foreign Currency
Translation?
The process by which a foreign subsidiary converts its
financial statements to the presentation currency, in
preparation for financial statement consolidation with the
parent company in conducting translation.
The company must determine: The exchange rate to be used
for translating different financial statement line items.
4.
5.
6.
7. Foreign Currency Translation
Process
1. Determine
local
currency
2.
Determine the functional
currency
3.
Determine to
report currency
4.
Re measure the financial statements of the
foreign entity into the functional currency
5.
Record gains and
losses that result from
the currency
translation.
8.
9. TRANSLATION RISK
Translation risk/translation exposure are
corporate treasury concepts used to
define the risks posed by exchange rate
volatility to the value of a company’s
foreign assets and liabilities.
Since exchange rates fluctuate
continuously, this triggers foreign currency
risk at the accounting level as it causes
the value of assets to go up or down.
This, in turn, generates FX gains and
losses that may distort the company’s
overall performance.
10. TYPES OF TRANSLATION
RATES
HISTORICAL
RATE
• It is the
exchange rate
prevailing
when a foreign
currency asset
was first
acquired, or a
foreign
currency
liability was
first incurred.
CURRENT
RATE
• It is the
exchange rate
prevailing as of
the financial
statement
date.
AVERAGE
RATE
• It is a simple or
weighted
average of
either historical
or current
exchange rate
for the whole
accounting
year.
11. ACCOUNTING TREATMENT OF
EXCHANGE DIFFERENCES
For instance, when an Indian company which buys good
from U.S.A, is required to make payment in $.
While recording transactions, Indian company has to
translate the value of transaction in its own currency by
usually using a spot rate prevailing on the date of
transaction.
But if the exchange rate changes at the time of settlement,
the value will differ, hence requires an
ACCOUNTING TREATMENT OF THE DIFFERENCE
12. THREE DATE CYCLE
The accounting issues concerning to
international events revolve around the
important date related with the transaction. For
this there is a 3 date cycle as follows:-
1) Firstly, the date on which transaction is
initiated.
2) Secondly, an interim reporting date.
3) Finally, the date of settlement.
14. SINGLE TRANSACTION
APPROACH
It is based on the premise that any transaction
and its settlement is a SINGLE EVENT.
If any exchange difference is there that may be
charged to cost of good purchased or to an
export sale.
15.
16. DOUBLE TRANSACTION
APPROACH
In contrast to single transaction approach, Dual transaction
approach considers exchange element separately,
In other words, purchase or sale is recorded in the books of
accounts at the exchange rate prevailing at the date of
transaction and adjustments are not made for any change
in exchange rates.
These changes in exchange rates on different dates are treated
as expenses and charged to loss on foreign exchange
account.
17.
18. ACCOUNTING FOR CURRENCY
TRANSLATION: FINANCIAL
STATEMENT
Let us make in-depth study of the accounting for currency
translation.
Translation problem arises on account of the system of
flexible exchange rates now prevalent.
Accountants, these days are facing two types of problems in
relation to translation.
i. One is translation process.
ii. Translation differences to be accounted for.
19. FOR EXAMPLE,
For instance US branch of an Indian Company buys an asset
costing $ 2000 on 31, December 2010 when the rate of exchange
was 1$ = 45 INR.
A year later on 31st December 2011, the branch still held the asset
and it is shown in balance sheet at its historical cost of
$ 2000 & the exchange rate was 1$ = 48 INR.
While showing the financial statements of the US Branch, the Indian
company will face with following two problems.
20. Problems are :
What value should be shown for the asset in the
balance sheet?
1
Asset can be shown :
at the Date of acquiring
it
by translating the
amount into
INR i.e
$2000@45 = RS.
90,000
2
Asset can be shown :
at the balance sheet
date
At prevailing rate
At the end of accounting
period
INR i.e
$2000@48 = RS.96,000
TO BE TREATED AS HISTORICAL TO BE TREATED AS CURRENT
21. Accounting FOR CURRENCY
TRANSLATION
SINGLE RATE
APPROACH
CURRENT
RATE
METHOD
MULTIPLE RATE APPROACH
CURRENT/NO
N CURRENT
METHOD
MONETARY/NON-
MONETARY
METHOD TEMPORAL
METHOD
PROBLEM ARISES : HOW TO DEAL WITH DIFFERENCE
OF RS. 6,000 ?
22.
23. CURRENT/NON-CURRENT
METHOD
Under this method balance sheet items are classified
as:
CURRENT ITEMS
(assets that are usually
converted into cash
within a year)
Ex cash and cash
equivalents, accounts
receivable, and
inventories
NON-CURRENT
ITEMS
(of which full value is not
realized within
accounting year)
Ex. Patents, investment
in other companies, PPE
AT CURRENT
EXCHANGE RATE
AT HISTORICAL
EXCHANGE RATE
24. CURRENT RATE APPROACH
It applies a single exchange rate , the current or
closing rate , to all foreign currency assets.
Also known as SINGLE RATE APPROACH
This approach treats foreign operations as if they
existed separately and apart from the parent
25. EXCEPTION : TREATMENT OF
EQUITY
The equity will always be calculated at the historical rate,
which is the original rate.
For example,
If you are translating the share capital, the historical rate for share
capital would be the exchange rate on the day when those shares
were issued.
26. EXCEPTION :
REVENUE AND EXPENSES
All revenues and expenses, COGS,
depreciation, and
amortization are
translated by an
appropriate weighted
average of currency
exchange rates for the period.
28. TEMPORAL METHOD
Here’s a brief breakdown of how this works:
• This method is usually consistent with the
monetary/non-monetary method. It includes
following:
Non-monetary items
which include things such as
fixed assets- property, plant,
and equipment and inventory
CURRENT
EXCHANGE
RATE
29.
30. WHEN TO
USE
CURRENT/
TEMPORAL
METHOD
CURRENT METHOD
If Local Currency =
Functional Currency
≠ Presentation
Currency
$ = $ ≠ INR
TEMPORAL
METHOD
If Local Currency ≠
Functional Currency
= Reporting
Currency
$ ≠ $ =
INR
FROM FUNCTIONAL
CURRENCY TO
PRESENTATION
CURRENCY
FROM LOCAL
CURRENCY TO
FUNCTIONAL
CURRENCY
31.
32.
33. Foreign Currency Translation
Adjustment
When cash flows are translated from the local currency into the
currency used for financial reporting, the translation may result in a
gain or loss.
Recognizing the gain or loss is commonly referred to as a Currency
Translation Adjustment (CTA).
They also create more fluctuation in financial results.
If translations between currencies are not hedged, they can create large
financial losses. Losses occur if there is a large fluctuation in the
currency exchange rate.
34.
35.
36.
37. Conversion of
Trial Balance from
Foreign Currency to
Reporting Currency
(CERTAIN RULES OF CONVERSION ARE
FOLLOWED)
38. RULES FOR CONVERSION
If the exchange rate is subject to frequent and violent
fluctuations then under mentioned rules should be
followed for conversion:
1. Fixed assets must be converted at the rate of exchange
prevailing on the day when these assets were bought
or on the date of contract.
2. Fixed liabilities should be converted at the exchange
rate ruling on the day when liabilities were incurred.
3. Current assets or liabilities should be converted at the
39. CONT…..
4. Revenue items should be converted at average rate ruling
during the period under review.
After converting all the figures as above, a new trial balance
can be prepared if some differences are there , that
differences can be placed to new account under the head
“DIFFERENCES IN EXCHANGE ACCOUNT”
