FAR 2-6: Foreign Currency Accounting

Question 1

Identify the 2 foreign currency activities

Answer 1

• Foreign currency translations

* Foreign currency transactions

Question 2

What is an entity’s functional currency under U.S. GAAP?

Answer 2

The functional currency is the currency of the primary economic environment in which the entity operates. ALL of the following conditions MUST be met:

• The foreign operations are relatively self-contained & integrated within the country
• The day-to-day operations do not depend on the parent’s or investor’s functional currency
• The local economy of the foreign entity is not highly inflationary

Question 3

When is the translation method used?

Answer 3

Translation is used to restate financial statements denominated in the functional currency to the reporting currency

Question 4

When is the remeasurement method used?

Answer 4

Remeasurement is used to restate financial statements from the foreign currency to the entity’s functional currency when:

• The reporting currency is the functional currency
• The financial statements must be restated in the entity’s functional currency prior to translating from the functional currency to the reporting currency

Question 5

Identify the exchange rate to be used when translating different components of the balance sheet & income statement

Answer 5

• Assets & liabilities: Current exchange rate
• Common stock & APIC: Historical rate
• Revenues & expenses: Weighted-average exchange rate for the period

Question 6

Identify the exchange rate to be used when remeasuring different components of the balance sheet & income statement

Answer 6

Balance sheet:

• Monetary: current exchange rate
• Nonmonetary: historical rate

Income statement:

• Balance sheet related: historical rate
• Non-balance sheet related: weighted-average

Question 7

Where are remeasurement gain/loss reported in the financial statements?

Answer 7

Remeasurement gains or losses are recognized in the income statement

Question 8

Where are translation adjustments reported in the financial statements?

Answer 8

Translation gains or losses are reported in other comprehensive income. They are treated as unrealized gains & losses.

Question 9

State 2 types of foreign currency transactions

Answer 9

• Operating transactions, such as importing, exporting, borrowing, lending, & investing transactions
• Forward exchange contracts, which are agreements to exchange 2 different currencies at a specific future date & at a specific rate

Question 10

Where are foreign currency transaction gains or losses reported in the financial statements?

Answer 10

Foreign currency transaction gains or losses are included in determining net income for the period

Question 11

For operating transactions in foreign currency, detail the reporting process

Answer 11

• Record original transaction at exchange or spot rate on the date of transaction
• At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate
• On payment date, compute gain/loss on the transaction by using the exchange rate on payment date