SlideShare a Scribd company logo
1 of 25
International Accounting, 7/e
Frederick D.S. Choi
Gary K. Meek
Chapter 6: Foreign Currency
Translation
www.HelpWithAssignment.com
Learning Objectives
 Why do firms translate from one currency to another?
 What is the difference between a spot, forward, and swap
transaction?
 What exchange rates are used in the currency translation
process and what are their financial statement effects?
 How does a translation gain or loss differ from a transactions
gain or loss?
 Is there more than one way of translating financial statements
from one currency to another? If so, what are they?
 How does the temporal method of currency translation differ from
the current rate method?
 What is the relationship between currency translation and
inflation?
www.HelpWithAssignment.com
Why do Firms Translate?
 Facilitates the preparation of consolidated financial
statements that allow readers to see the performance
of a multinational company’s total operations both
domestic and foreign.
 Facilitates the measurement of a firm’s exposure to
foreign exchange risk.
 Facilitates the recording of foreign currency
transactions; i.e., foreign currency sales, purchases,
borrowing or lending in the consolidated entity’s
reporting currency.
 Facilitates reporting domestic accounts to foreign
audiences-of-interest.
www.HelpWithAssignment.com
Types of Transaction Rates
 Spot transactions: the physical exchange of one currency for
another in which delivery takes place immediately.
 Direct quote: the exchange rate specifies the number of
domestic currency units needed to acquire a unit of foreign
currency.
 Indirect quote: the exchange rate specifies the price of a unit of
the domestic currency in terms of the foreign currency.
 Forward transaction: agreements to exchange a specified
amount of one currency for another at a future date.
 Swap transaction: involves the simultaneous spot purchase and
forward sale, or spot sale and forward purchase of a currency.
www.HelpWithAssignment.com
Accounting for Spot
Transactions
 Spot transaction: occurs when an enterprise purchases or sells
goods for which payment is made in a foreign currency, or when it
borrows or lends foreign currency.
 At the transaction date, each asset, liability, revenue, and expense
denominated in a foreign currency is measured and recorded in the
functional currency of the reporting entity at the spot exchange rate
in effect on that date.
 Functional currency is the primary currency in which the
reporting entity transacts business and generates and
spends cash; e.g., dollars in the case of a U.S. reporting
entity.
 At each balance sheet date, recorded balances denominated
in a currency other than the functional currency of the
reporting entity is adjusted to reflect the current exchange
rate.
www.HelpWithAssignment.com
Accounting for Spot
Transactions (contin)
 A foreign exchange gain or loss is recorded whenever
the exchange rate changes between the original
transaction date and the settlement date, or between the
original transaction date and the financial statement date
should financial statements be prepared prior to
settlement.
 Example: On September 1, a calendar year U.S.
manufacturer sells, on 90-day credit, goods to a Swedish
importer for SEK 1,000,000. The dollar/krona exchange
rate is $0.12 = SEK1 on September 1, $0.11 = SEK 1 on
September 30, and $0.09 = SEK 1 on December 1.
www.HelpWithAssignment.com
www.HelpWithAssignment.com
Types of Translation Rates and
their Statement Effects
 Historical rate: the exchange rate prevailing when a foreign
currency asset was first acquired or a foreign currency liability
first incurred.
 Preserves the original cost equivalent of a foreign currency item
in the reporting currency.
 Use of historical rates do not give rise to translation gains or
losses, which are increases or decreases in the reporting
currency equivalent of the foreign currency.
 Current rate: the exchange rate prevailing as of the financial
statement date.
 Changes the reporting currency equivalent of a foreign currency
item whenever exchange rates change.
 Use of the current rate gives rise to translation gains and losses.
 Average rate: a simple or weighted average of either
historical or current exchange rates.
www.HelpWithAssignment.com
Translation vs. Transaction
Gains or Losses
 Translation gains or losses: result from a
restatement process.
 Transactions gains or losses: result from the
physical exchange of one currency for another.
 Gain or loss on a settled transaction: arises whenever
the exchange rate used to book the original transaction
differs from the exchange rate used at settlement.
 Gain or loss on an unsettled transaction: arises
whenever consolidated financial statements are prepared
before settlement and the current rate has changed since
the transaction date.
 Is similar to a translation gain or loss as it results from a
restatement process.
www.HelpWithAssignment.com
www.HelpWithAssignment.com
Types of Translation Methods
 Single rate method: applies a single
exchange rate, the current rate, to all foreign
currency assets and liabilities.
 Multiple rate methods: Use some
combination or current and historical rates to
translate foreign currency balances.
www.HelpWithAssignment.com
www.HelpWithAssignment.com
Current-Noncurrent Method
 Current assets and current liabilities translated at
the current rate.
 Noncurrent assets and liabilities translated at the
historical rate.
 Revenues and expenses (excluding depreciation
and amortization) translated at average rates.
 Depreciation and amortization charges at historical
rates in effect when related assets are acquired.
www.HelpWithAssignment.com
www.HelpWithAssignment.com
www.HelpWithAssignment.com
Monetary-Nonmonetary
Method
 Monetary assets and liabilities translated at current
rates.
 Nonmonetary assets and liabilities translated at
historical rates.
 Revenues and expenses, excluding depreciation,
amortization and cost of sales, at average rates.
 Depreciation, amortization charges, and cost of
sales at historical rates in effect when related assets
are acquired.
 See Exhibits 6-8 and 6-9.
www.HelpWithAssignment.com
Temporal Method
 Monetary assets and liabilities translated at the current rate.
 Nonmonetary items translated at rates that preserve their original
measurement bases.
 Foreign currency balances at historical cost are translated at
historical rates.
 Foreign currency balances at current cost or market value are
translated at the current rate.
 Revenues and expenses, including cost of sales if inventories
are carried at market, at average rates.
 Depreciation, amortization charges, and cost of sales when
inventories are carried at cost, at historical rates in effect when
related assets are acquired.
 See Exhibits 6-8 and 6-9.
www.HelpWithAssignment.com
Current (Single) Rate Method
 All foreign assets and liabilities translated at
the current rate.
 All revenues and expenses are translated by
an appropriately weighted average of current
exchange rates for the period.
 See Exhibits 6-8 and 6-9.
www.HelpWithAssignment.com
Features of FASB 52 and IAS
21
 Objectives
 Reflect in consolidated statements the financial results and
relationships measured in the primary currency in which
each consolidated entity does business.
 Provide information compatible with the expected
economic effects of an exchange rate change on an
entity’s cash flows and equity.
 Objectives based on the notion of a
functional currency defined earlier.
 Functional currency can be the parent currency.
 Functional currency can be the local currency.
www.HelpWithAssignment.com
www.HelpWithAssignment.com
Features of FASB 52 and IAS
21 (contin)
 Translation when the parent currency is functional.
 Foreign currency financial statements remeasured to
reporting currency using the temporal method.
 Translation gains and losses resulting from the translation
process are included in current income.
 Translation when the local currency is functional.
 Foreign currency financial statements translated to
reporting currency using the current rate method.
 Translation gains and losses disclosed as a separate
component of consolidated equity.
www.HelpWithAssignment.com
Relationship Between Foreign
Currency Translation and Inflation
 The external value of a country’s currency is
inversely related to its rate of inflation.
 IAS 21 permits restatement for local inflation prior to
currency translation.
 FAS 52 requires use of the parent currency as the
functional currency for foreign operations located in
hyperinflationary environments (i.e., countries where
the cumulative rate of inflation exceeds 100% over a
three-year period).
www.HelpWithAssignment.com
Other Chapter Exhibits (contin)
www.HelpWithAssignment.com
Other Chapter Exhibits (contin)
www.HelpWithAssignment.com
www.HelpWithAssignment.com
For more details on Accounting Assignment Help visit our website
at http://www.helpwithassignment.com/accounting-assignment-help
www.HelpWithAssignment.com

More Related Content

What's hot

Ind AS 115 Revenue from Contracts with Customers
Ind AS 115 Revenue from Contracts with CustomersInd AS 115 Revenue from Contracts with Customers
Ind AS 115 Revenue from Contracts with Customersnitish aggarwal
 
Ind AS on Financial Instruments
Ind AS on Financial InstrumentsInd AS on Financial Instruments
Ind AS on Financial InstrumentsPranav Joshi
 
Foreign Exchange market & international Parity Relations
Foreign Exchange market & international Parity RelationsForeign Exchange market & international Parity Relations
Foreign Exchange market & international Parity Relationspalakurthiharika
 
Foreign exchange exposure
Foreign exchange exposureForeign exchange exposure
Foreign exchange exposureTaher Ahmed
 
Methods of payment (Mergers and Acquisitions)
Methods of payment (Mergers and Acquisitions)Methods of payment (Mergers and Acquisitions)
Methods of payment (Mergers and Acquisitions)Ayush Gupta
 
Ind AS 18 Revenue Recognition
Ind AS 18 Revenue RecognitionInd AS 18 Revenue Recognition
Ind AS 18 Revenue RecognitionPooja Gupta
 
Unit 5 Forex Risk Management
Unit 5 Forex Risk ManagementUnit 5 Forex Risk Management
Unit 5 Forex Risk ManagementCharu Rastogi
 
Earning per share AS- 20
Earning per share AS- 20Earning per share AS- 20
Earning per share AS- 20VIKAS DUBEY
 
Accounting standard (AS - 11)
Accounting standard (AS - 11)Accounting standard (AS - 11)
Accounting standard (AS - 11)Saloni Jain
 
Financial instrument IAS 32 IFRS 7 & and IFRS; 9
Financial instrument   IAS 32  IFRS 7 & and IFRS;   9Financial instrument   IAS 32  IFRS 7 & and IFRS;   9
Financial instrument IAS 32 IFRS 7 & and IFRS; 9AdeadebayoShuaib
 
Accounting standard 11
Accounting standard 11Accounting standard 11
Accounting standard 11Amith Kumar
 
Accounting standard 12
Accounting  standard 12Accounting  standard 12
Accounting standard 12ykasera2
 
IFRS 15 - the new revenue recognition standard
IFRS 15 - the new revenue recognition standard IFRS 15 - the new revenue recognition standard
IFRS 15 - the new revenue recognition standard EY Belgium
 
Accounting Standard 17
Accounting Standard 17Accounting Standard 17
Accounting Standard 17Tushar Rathi
 
Liquidation of Companies
Liquidation of CompaniesLiquidation of Companies
Liquidation of CompaniesDivyaKamaliya
 

What's hot (20)

Ind AS 115 Revenue from Contracts with Customers
Ind AS 115 Revenue from Contracts with CustomersInd AS 115 Revenue from Contracts with Customers
Ind AS 115 Revenue from Contracts with Customers
 
Swap
SwapSwap
Swap
 
Ind AS on Financial Instruments
Ind AS on Financial InstrumentsInd AS on Financial Instruments
Ind AS on Financial Instruments
 
Foreign Exchange market & international Parity Relations
Foreign Exchange market & international Parity RelationsForeign Exchange market & international Parity Relations
Foreign Exchange market & international Parity Relations
 
Foreign exchange exposure
Foreign exchange exposureForeign exchange exposure
Foreign exchange exposure
 
Methods of payment (Mergers and Acquisitions)
Methods of payment (Mergers and Acquisitions)Methods of payment (Mergers and Acquisitions)
Methods of payment (Mergers and Acquisitions)
 
Ind AS 18 Revenue Recognition
Ind AS 18 Revenue RecognitionInd AS 18 Revenue Recognition
Ind AS 18 Revenue Recognition
 
Unit 5 Forex Risk Management
Unit 5 Forex Risk ManagementUnit 5 Forex Risk Management
Unit 5 Forex Risk Management
 
As 19 lease
As 19 leaseAs 19 lease
As 19 lease
 
Earning per share AS- 20
Earning per share AS- 20Earning per share AS- 20
Earning per share AS- 20
 
Accounting standard (AS - 11)
Accounting standard (AS - 11)Accounting standard (AS - 11)
Accounting standard (AS - 11)
 
Journal entries
Journal entriesJournal entries
Journal entries
 
Financial instrument IAS 32 IFRS 7 & and IFRS; 9
Financial instrument   IAS 32  IFRS 7 & and IFRS;   9Financial instrument   IAS 32  IFRS 7 & and IFRS;   9
Financial instrument IAS 32 IFRS 7 & and IFRS; 9
 
Accounting standards
Accounting standardsAccounting standards
Accounting standards
 
Accounting standard 11
Accounting standard 11Accounting standard 11
Accounting standard 11
 
New goverment grant ias 20
New goverment grant ias 20New goverment grant ias 20
New goverment grant ias 20
 
Accounting standard 12
Accounting  standard 12Accounting  standard 12
Accounting standard 12
 
IFRS 15 - the new revenue recognition standard
IFRS 15 - the new revenue recognition standard IFRS 15 - the new revenue recognition standard
IFRS 15 - the new revenue recognition standard
 
Accounting Standard 17
Accounting Standard 17Accounting Standard 17
Accounting Standard 17
 
Liquidation of Companies
Liquidation of CompaniesLiquidation of Companies
Liquidation of Companies
 

Viewers also liked

Chinese RMB needs to be a regional currency before an international reserve c...
Chinese RMB needs to be a regional currency before an international reserve c...Chinese RMB needs to be a regional currency before an international reserve c...
Chinese RMB needs to be a regional currency before an international reserve c...Macro Currency Group
 
Clever Currency Management & VAT
Clever Currency Management & VATClever Currency Management & VAT
Clever Currency Management & VATWorld First
 
Currency Exchange International
Currency Exchange InternationalCurrency Exchange International
Currency Exchange InternationalCeifx_marketing
 
8. International Currency and Currency Crisis
8. International Currency and Currency Crisis8. International Currency and Currency Crisis
8. International Currency and Currency CrisisCharu Rastogi
 
Starbucks International Marketing Strategy
Starbucks International Marketing StrategyStarbucks International Marketing Strategy
Starbucks International Marketing StrategyShahzad Khan
 
International accounting: foreign currency
International accounting: foreign currencyInternational accounting: foreign currency
International accounting: foreign currencyMohammed Alashi
 

Viewers also liked (8)

Chinese RMB needs to be a regional currency before an international reserve c...
Chinese RMB needs to be a regional currency before an international reserve c...Chinese RMB needs to be a regional currency before an international reserve c...
Chinese RMB needs to be a regional currency before an international reserve c...
 
Clever Currency Management & VAT
Clever Currency Management & VATClever Currency Management & VAT
Clever Currency Management & VAT
 
Convertability
ConvertabilityConvertability
Convertability
 
Currency Exchange International
Currency Exchange InternationalCurrency Exchange International
Currency Exchange International
 
8. International Currency and Currency Crisis
8. International Currency and Currency Crisis8. International Currency and Currency Crisis
8. International Currency and Currency Crisis
 
Starbucks International Marketing Strategy
Starbucks International Marketing StrategyStarbucks International Marketing Strategy
Starbucks International Marketing Strategy
 
International accounting: foreign currency
International accounting: foreign currencyInternational accounting: foreign currency
International accounting: foreign currency
 
Banking ppt
Banking pptBanking ppt
Banking ppt
 

Similar to International Accounting:Foreign Currency Translation

CHAPTER 11 Translation ExposureWhat gets measured gets managed..docx
CHAPTER 11 Translation ExposureWhat gets measured gets managed..docxCHAPTER 11 Translation ExposureWhat gets measured gets managed..docx
CHAPTER 11 Translation ExposureWhat gets measured gets managed..docxcravennichole326
 
Translation of Foreign Currency in Financial Statements An.docx
Translation of Foreign Currency in Financial Statements An.docxTranslation of Foreign Currency in Financial Statements An.docx
Translation of Foreign Currency in Financial Statements An.docxturveycharlyn
 
C Users Eddie Desktop Fin643 Shuang
C  Users Eddie Desktop Fin643 ShuangC  Users Eddie Desktop Fin643 Shuang
C Users Eddie Desktop Fin643 Shuangcoeycheung
 
IAS 21
IAS 21IAS 21
IAS 21RS P
 
Foreign Currency Transactions
Foreign Currency TransactionsForeign Currency Transactions
Foreign Currency TransactionsRavi Subramaniam
 
Accounting for foregn curency 6-1 (2).pptx
Accounting for foregn curency 6-1 (2).pptxAccounting for foregn curency 6-1 (2).pptx
Accounting for foregn curency 6-1 (2).pptxRobsanAfdal
 
Translation exposure
Translation exposureTranslation exposure
Translation exposureRinu Thomas
 
Question 12 20 pts Explain five criteria of Statement No. 52 in deter.pdf
Question 12 20 pts Explain five criteria of Statement No. 52 in deter.pdfQuestion 12 20 pts Explain five criteria of Statement No. 52 in deter.pdf
Question 12 20 pts Explain five criteria of Statement No. 52 in deter.pdfexpressionnoveltiesk
 
Intl biz lesson6
Intl biz lesson6Intl biz lesson6
Intl biz lesson6marzan
 
Foreign Currency Exposure And Risk
Foreign Currency Exposure And RiskForeign Currency Exposure And Risk
Foreign Currency Exposure And RiskBrahma Kumaris
 
Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1amit1002001
 
Accountingstandard21
Accountingstandard21 Accountingstandard21
Accountingstandard21 atsheetal
 
The effects of changes in foreign exchange rates
The effects of changes in foreign exchange ratesThe effects of changes in foreign exchange rates
The effects of changes in foreign exchange ratesanjalichaudhary75
 
Foreign Exchange Exposure
Foreign Exchange ExposureForeign Exchange Exposure
Foreign Exchange ExposureSundar B N
 
Foreign exchange exposure
Foreign exchange exposureForeign exchange exposure
Foreign exchange exposureKanchan Kandel
 
Exchange risk management
Exchange risk managementExchange risk management
Exchange risk managementwwgreatmutha
 

Similar to International Accounting:Foreign Currency Translation (20)

CHAPTER 11 Translation ExposureWhat gets measured gets managed..docx
CHAPTER 11 Translation ExposureWhat gets measured gets managed..docxCHAPTER 11 Translation ExposureWhat gets measured gets managed..docx
CHAPTER 11 Translation ExposureWhat gets measured gets managed..docx
 
Translation of Foreign Currency in Financial Statements An.docx
Translation of Foreign Currency in Financial Statements An.docxTranslation of Foreign Currency in Financial Statements An.docx
Translation of Foreign Currency in Financial Statements An.docx
 
C Users Eddie Desktop Fin643 Shuang
C  Users Eddie Desktop Fin643 ShuangC  Users Eddie Desktop Fin643 Shuang
C Users Eddie Desktop Fin643 Shuang
 
IAS 21
IAS 21IAS 21
IAS 21
 
Ind-AS-21-PPT.pdf
Ind-AS-21-PPT.pdfInd-AS-21-PPT.pdf
Ind-AS-21-PPT.pdf
 
Forex Class.ppt
Forex Class.pptForex Class.ppt
Forex Class.ppt
 
Foreign Currency Transactions
Foreign Currency TransactionsForeign Currency Transactions
Foreign Currency Transactions
 
Accounting for foregn curency 6-1 (2).pptx
Accounting for foregn curency 6-1 (2).pptxAccounting for foregn curency 6-1 (2).pptx
Accounting for foregn curency 6-1 (2).pptx
 
Translation exposure
Translation exposureTranslation exposure
Translation exposure
 
Question 12 20 pts Explain five criteria of Statement No. 52 in deter.pdf
Question 12 20 pts Explain five criteria of Statement No. 52 in deter.pdfQuestion 12 20 pts Explain five criteria of Statement No. 52 in deter.pdf
Question 12 20 pts Explain five criteria of Statement No. 52 in deter.pdf
 
Intl biz lesson6
Intl biz lesson6Intl biz lesson6
Intl biz lesson6
 
Foreign Currency Exposure And Risk
Foreign Currency Exposure And RiskForeign Currency Exposure And Risk
Foreign Currency Exposure And Risk
 
Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1
 
Accountingstandard21
Accountingstandard21 Accountingstandard21
Accountingstandard21
 
The effects of changes in foreign exchange rates
The effects of changes in foreign exchange ratesThe effects of changes in foreign exchange rates
The effects of changes in foreign exchange rates
 
Foreign Exchange Exposure
Foreign Exchange ExposureForeign Exchange Exposure
Foreign Exchange Exposure
 
Fx and TP
Fx and TPFx and TP
Fx and TP
 
Foreign exchange exposure
Foreign exchange exposureForeign exchange exposure
Foreign exchange exposure
 
Erm
ErmErm
Erm
 
Exchange risk management
Exchange risk managementExchange risk management
Exchange risk management
 

Recently uploaded

Framing an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdf
Framing an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdfFraming an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdf
Framing an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdfUjwalaBharambe
 
ACC 2024 Chronicles. Cardiology. Exam.pdf
ACC 2024 Chronicles. Cardiology. Exam.pdfACC 2024 Chronicles. Cardiology. Exam.pdf
ACC 2024 Chronicles. Cardiology. Exam.pdfSpandanaRallapalli
 
Field Attribute Index Feature in Odoo 17
Field Attribute Index Feature in Odoo 17Field Attribute Index Feature in Odoo 17
Field Attribute Index Feature in Odoo 17Celine George
 
Influencing policy (training slides from Fast Track Impact)
Influencing policy (training slides from Fast Track Impact)Influencing policy (training slides from Fast Track Impact)
Influencing policy (training slides from Fast Track Impact)Mark Reed
 
Alper Gobel In Media Res Media Component
Alper Gobel In Media Res Media ComponentAlper Gobel In Media Res Media Component
Alper Gobel In Media Res Media ComponentInMediaRes1
 
What is Model Inheritance in Odoo 17 ERP
What is Model Inheritance in Odoo 17 ERPWhat is Model Inheritance in Odoo 17 ERP
What is Model Inheritance in Odoo 17 ERPCeline George
 
DATA STRUCTURE AND ALGORITHM for beginners
DATA STRUCTURE AND ALGORITHM for beginnersDATA STRUCTURE AND ALGORITHM for beginners
DATA STRUCTURE AND ALGORITHM for beginnersSabitha Banu
 
Full Stack Web Development Course for Beginners
Full Stack Web Development Course  for BeginnersFull Stack Web Development Course  for Beginners
Full Stack Web Development Course for BeginnersSabitha Banu
 
MULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptx
MULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptxMULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptx
MULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptxAnupkumar Sharma
 
Employee wellbeing at the workplace.pptx
Employee wellbeing at the workplace.pptxEmployee wellbeing at the workplace.pptx
Employee wellbeing at the workplace.pptxNirmalaLoungPoorunde1
 
Proudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptxProudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptxthorishapillay1
 
Quarter 4 Peace-education.pptx Catch Up Friday
Quarter 4 Peace-education.pptx Catch Up FridayQuarter 4 Peace-education.pptx Catch Up Friday
Quarter 4 Peace-education.pptx Catch Up FridayMakMakNepo
 
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptxECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptxiammrhaywood
 
Judging the Relevance and worth of ideas part 2.pptx
Judging the Relevance  and worth of ideas part 2.pptxJudging the Relevance  and worth of ideas part 2.pptx
Judging the Relevance and worth of ideas part 2.pptxSherlyMaeNeri
 
Planning a health career 4th Quarter.pptx
Planning a health career 4th Quarter.pptxPlanning a health career 4th Quarter.pptx
Planning a health career 4th Quarter.pptxLigayaBacuel1
 
Types of Journalistic Writing Grade 8.pptx
Types of Journalistic Writing Grade 8.pptxTypes of Journalistic Writing Grade 8.pptx
Types of Journalistic Writing Grade 8.pptxEyham Joco
 
AMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdf
AMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdfAMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdf
AMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdfphamnguyenenglishnb
 
Atmosphere science 7 quarter 4 .........
Atmosphere science 7 quarter 4 .........Atmosphere science 7 quarter 4 .........
Atmosphere science 7 quarter 4 .........LeaCamillePacle
 

Recently uploaded (20)

Framing an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdf
Framing an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdfFraming an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdf
Framing an Appropriate Research Question 6b9b26d93da94caf993c038d9efcdedb.pdf
 
ACC 2024 Chronicles. Cardiology. Exam.pdf
ACC 2024 Chronicles. Cardiology. Exam.pdfACC 2024 Chronicles. Cardiology. Exam.pdf
ACC 2024 Chronicles. Cardiology. Exam.pdf
 
Field Attribute Index Feature in Odoo 17
Field Attribute Index Feature in Odoo 17Field Attribute Index Feature in Odoo 17
Field Attribute Index Feature in Odoo 17
 
Influencing policy (training slides from Fast Track Impact)
Influencing policy (training slides from Fast Track Impact)Influencing policy (training slides from Fast Track Impact)
Influencing policy (training slides from Fast Track Impact)
 
9953330565 Low Rate Call Girls In Rohini Delhi NCR
9953330565 Low Rate Call Girls In Rohini  Delhi NCR9953330565 Low Rate Call Girls In Rohini  Delhi NCR
9953330565 Low Rate Call Girls In Rohini Delhi NCR
 
Alper Gobel In Media Res Media Component
Alper Gobel In Media Res Media ComponentAlper Gobel In Media Res Media Component
Alper Gobel In Media Res Media Component
 
What is Model Inheritance in Odoo 17 ERP
What is Model Inheritance in Odoo 17 ERPWhat is Model Inheritance in Odoo 17 ERP
What is Model Inheritance in Odoo 17 ERP
 
DATA STRUCTURE AND ALGORITHM for beginners
DATA STRUCTURE AND ALGORITHM for beginnersDATA STRUCTURE AND ALGORITHM for beginners
DATA STRUCTURE AND ALGORITHM for beginners
 
Full Stack Web Development Course for Beginners
Full Stack Web Development Course  for BeginnersFull Stack Web Development Course  for Beginners
Full Stack Web Development Course for Beginners
 
MULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptx
MULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptxMULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptx
MULTIDISCIPLINRY NATURE OF THE ENVIRONMENTAL STUDIES.pptx
 
Employee wellbeing at the workplace.pptx
Employee wellbeing at the workplace.pptxEmployee wellbeing at the workplace.pptx
Employee wellbeing at the workplace.pptx
 
Proudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptxProudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptx
 
Quarter 4 Peace-education.pptx Catch Up Friday
Quarter 4 Peace-education.pptx Catch Up FridayQuarter 4 Peace-education.pptx Catch Up Friday
Quarter 4 Peace-education.pptx Catch Up Friday
 
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptxECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
 
Judging the Relevance and worth of ideas part 2.pptx
Judging the Relevance  and worth of ideas part 2.pptxJudging the Relevance  and worth of ideas part 2.pptx
Judging the Relevance and worth of ideas part 2.pptx
 
Planning a health career 4th Quarter.pptx
Planning a health career 4th Quarter.pptxPlanning a health career 4th Quarter.pptx
Planning a health career 4th Quarter.pptx
 
Types of Journalistic Writing Grade 8.pptx
Types of Journalistic Writing Grade 8.pptxTypes of Journalistic Writing Grade 8.pptx
Types of Journalistic Writing Grade 8.pptx
 
AMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdf
AMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdfAMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdf
AMERICAN LANGUAGE HUB_Level2_Student'sBook_Answerkey.pdf
 
Atmosphere science 7 quarter 4 .........
Atmosphere science 7 quarter 4 .........Atmosphere science 7 quarter 4 .........
Atmosphere science 7 quarter 4 .........
 
Raw materials used in Herbal Cosmetics.pptx
Raw materials used in Herbal Cosmetics.pptxRaw materials used in Herbal Cosmetics.pptx
Raw materials used in Herbal Cosmetics.pptx
 

International Accounting:Foreign Currency Translation

  • 1. International Accounting, 7/e Frederick D.S. Choi Gary K. Meek Chapter 6: Foreign Currency Translation www.HelpWithAssignment.com
  • 2. Learning Objectives  Why do firms translate from one currency to another?  What is the difference between a spot, forward, and swap transaction?  What exchange rates are used in the currency translation process and what are their financial statement effects?  How does a translation gain or loss differ from a transactions gain or loss?  Is there more than one way of translating financial statements from one currency to another? If so, what are they?  How does the temporal method of currency translation differ from the current rate method?  What is the relationship between currency translation and inflation? www.HelpWithAssignment.com
  • 3. Why do Firms Translate?  Facilitates the preparation of consolidated financial statements that allow readers to see the performance of a multinational company’s total operations both domestic and foreign.  Facilitates the measurement of a firm’s exposure to foreign exchange risk.  Facilitates the recording of foreign currency transactions; i.e., foreign currency sales, purchases, borrowing or lending in the consolidated entity’s reporting currency.  Facilitates reporting domestic accounts to foreign audiences-of-interest. www.HelpWithAssignment.com
  • 4. Types of Transaction Rates  Spot transactions: the physical exchange of one currency for another in which delivery takes place immediately.  Direct quote: the exchange rate specifies the number of domestic currency units needed to acquire a unit of foreign currency.  Indirect quote: the exchange rate specifies the price of a unit of the domestic currency in terms of the foreign currency.  Forward transaction: agreements to exchange a specified amount of one currency for another at a future date.  Swap transaction: involves the simultaneous spot purchase and forward sale, or spot sale and forward purchase of a currency. www.HelpWithAssignment.com
  • 5. Accounting for Spot Transactions  Spot transaction: occurs when an enterprise purchases or sells goods for which payment is made in a foreign currency, or when it borrows or lends foreign currency.  At the transaction date, each asset, liability, revenue, and expense denominated in a foreign currency is measured and recorded in the functional currency of the reporting entity at the spot exchange rate in effect on that date.  Functional currency is the primary currency in which the reporting entity transacts business and generates and spends cash; e.g., dollars in the case of a U.S. reporting entity.  At each balance sheet date, recorded balances denominated in a currency other than the functional currency of the reporting entity is adjusted to reflect the current exchange rate. www.HelpWithAssignment.com
  • 6. Accounting for Spot Transactions (contin)  A foreign exchange gain or loss is recorded whenever the exchange rate changes between the original transaction date and the settlement date, or between the original transaction date and the financial statement date should financial statements be prepared prior to settlement.  Example: On September 1, a calendar year U.S. manufacturer sells, on 90-day credit, goods to a Swedish importer for SEK 1,000,000. The dollar/krona exchange rate is $0.12 = SEK1 on September 1, $0.11 = SEK 1 on September 30, and $0.09 = SEK 1 on December 1. www.HelpWithAssignment.com
  • 8. Types of Translation Rates and their Statement Effects  Historical rate: the exchange rate prevailing when a foreign currency asset was first acquired or a foreign currency liability first incurred.  Preserves the original cost equivalent of a foreign currency item in the reporting currency.  Use of historical rates do not give rise to translation gains or losses, which are increases or decreases in the reporting currency equivalent of the foreign currency.  Current rate: the exchange rate prevailing as of the financial statement date.  Changes the reporting currency equivalent of a foreign currency item whenever exchange rates change.  Use of the current rate gives rise to translation gains and losses.  Average rate: a simple or weighted average of either historical or current exchange rates. www.HelpWithAssignment.com
  • 9. Translation vs. Transaction Gains or Losses  Translation gains or losses: result from a restatement process.  Transactions gains or losses: result from the physical exchange of one currency for another.  Gain or loss on a settled transaction: arises whenever the exchange rate used to book the original transaction differs from the exchange rate used at settlement.  Gain or loss on an unsettled transaction: arises whenever consolidated financial statements are prepared before settlement and the current rate has changed since the transaction date.  Is similar to a translation gain or loss as it results from a restatement process. www.HelpWithAssignment.com
  • 11. Types of Translation Methods  Single rate method: applies a single exchange rate, the current rate, to all foreign currency assets and liabilities.  Multiple rate methods: Use some combination or current and historical rates to translate foreign currency balances. www.HelpWithAssignment.com
  • 13. Current-Noncurrent Method  Current assets and current liabilities translated at the current rate.  Noncurrent assets and liabilities translated at the historical rate.  Revenues and expenses (excluding depreciation and amortization) translated at average rates.  Depreciation and amortization charges at historical rates in effect when related assets are acquired. www.HelpWithAssignment.com
  • 16. Monetary-Nonmonetary Method  Monetary assets and liabilities translated at current rates.  Nonmonetary assets and liabilities translated at historical rates.  Revenues and expenses, excluding depreciation, amortization and cost of sales, at average rates.  Depreciation, amortization charges, and cost of sales at historical rates in effect when related assets are acquired.  See Exhibits 6-8 and 6-9. www.HelpWithAssignment.com
  • 17. Temporal Method  Monetary assets and liabilities translated at the current rate.  Nonmonetary items translated at rates that preserve their original measurement bases.  Foreign currency balances at historical cost are translated at historical rates.  Foreign currency balances at current cost or market value are translated at the current rate.  Revenues and expenses, including cost of sales if inventories are carried at market, at average rates.  Depreciation, amortization charges, and cost of sales when inventories are carried at cost, at historical rates in effect when related assets are acquired.  See Exhibits 6-8 and 6-9. www.HelpWithAssignment.com
  • 18. Current (Single) Rate Method  All foreign assets and liabilities translated at the current rate.  All revenues and expenses are translated by an appropriately weighted average of current exchange rates for the period.  See Exhibits 6-8 and 6-9. www.HelpWithAssignment.com
  • 19. Features of FASB 52 and IAS 21  Objectives  Reflect in consolidated statements the financial results and relationships measured in the primary currency in which each consolidated entity does business.  Provide information compatible with the expected economic effects of an exchange rate change on an entity’s cash flows and equity.  Objectives based on the notion of a functional currency defined earlier.  Functional currency can be the parent currency.  Functional currency can be the local currency. www.HelpWithAssignment.com
  • 21. Features of FASB 52 and IAS 21 (contin)  Translation when the parent currency is functional.  Foreign currency financial statements remeasured to reporting currency using the temporal method.  Translation gains and losses resulting from the translation process are included in current income.  Translation when the local currency is functional.  Foreign currency financial statements translated to reporting currency using the current rate method.  Translation gains and losses disclosed as a separate component of consolidated equity. www.HelpWithAssignment.com
  • 22. Relationship Between Foreign Currency Translation and Inflation  The external value of a country’s currency is inversely related to its rate of inflation.  IAS 21 permits restatement for local inflation prior to currency translation.  FAS 52 requires use of the parent currency as the functional currency for foreign operations located in hyperinflationary environments (i.e., countries where the cumulative rate of inflation exceeds 100% over a three-year period). www.HelpWithAssignment.com
  • 23. Other Chapter Exhibits (contin) www.HelpWithAssignment.com
  • 24. Other Chapter Exhibits (contin) www.HelpWithAssignment.com
  • 25. www.HelpWithAssignment.com For more details on Accounting Assignment Help visit our website at http://www.helpwithassignment.com/accounting-assignment-help www.HelpWithAssignment.com