Three types of currencies in reporting context
presentation currency, functional currency, local currency
In terms of financial reporting, what is a foreign currency?
any currency other than functional currency
What is required recognition method for foreign currency transaction gains and losses (realized and unrealized) under IFRS abd US GAAP?
- both require realized as well as realized gains/losses to be reported in net income
- the two most common treatments: component of OCI; component of non-operating income/expense
Two primary conceptual issues associated with translation
- deciding on appropriate exchange rate
- bringing balance sheet back to balance
the three translation methods
- current rate method: all assets and liabilities at current rate, equity - at historical
- monetary / non-monetary: monetary assets/liabilities - at current; non-monetary assets/liabilities - at historical
- temporal method: monetary and non-monetary assets/liabilities (that are measured at current value) - current rate; else - historical rate
what translation method is required under IFRS and GAAP? (not considering inflationary environment)
- if functional currency is also parent’s presentation currency: temporal method
- if functional currency is different from parent’s presentation currency: current rate method
- if local currency is different from functional currency, then financial statement is restated into functional currency using temporal method
how translation adjustment is treated under temporal vs current method?
- current rate method: balance is regained by adding ‘translation adjustment’ to the balance sheet
- temporal method: balance is regained by adjusting retained earnings in the income statement with added ‘translation gain/loss’ entry
how accounts are translated in hyperinflationary environment under IFRS and US GAAP?
- IFRS: financial statements are to be restated for inflation, then translated using current rate method
- US GAAP: no restatement, temporal method is used
How common stock and equity values are translated under the current rate method?
- when equity is broken into separate accounts, common stock is translated at historical rate
- however, when equity is taken as a whole, it is translated at the current rate
