Foreign Currency Accounting

Question 1

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

Answer 1

The currency of the primary economy in which the business operates.

If functional currency = reporting currency

Question 2

What conditions must be met for a currency to qualify as the functional currency?

Answer 2

1) Foreign operations are self-contained and integrated within the country
2) The day to day operations do not depend on the parent’s or investor’s functional currency
3) The local economy of the foreign entity is not highly inflationary

Question 3

What is a reporting currency?

Answer 3

The currency of the entity that is ultimately reporting financial results of the foreign entity

Question 4

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

Answer 4

Assets & liabilities = current exchange rate

Common Stock & APIC = Historical rate

Revenues & Expenses = Weighted average exchange rate for the period

Question 5

Where are translation adjustments reported in the financial statements?

Answer 5

OCI. They are treated as unrealized gains and losses

Question 6

For operating transactions in foreign currency, detail the recording process

Answer 6

Record original transaction at exchange or spot rate on 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

Question 7

Identify the two foreign currency activities

Answer 7

Foreign currency translations: conversion of financial statements of a foreign entity into domestic currency

Foreign currency transactions: transactions with a foreign entity denominated (to be settled in) a foreign currency

Question 8

When is the translation method used?

Answer 8

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

Question 9

When is the remeasurement method used?

Answer 9

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 to the functional currency to the reporting currency