This document discusses foreign currency translation, which is the process of converting financial data expressed in one currency into another currency. It provides definitions and outlines the challenges of currency translation, specifically which exchange rate to use for assets/liabilities and how to account for gains/losses. The key methods discussed are the temporal method, which uses historical exchange rates, and the closing rate method, which uses the rate at the end of the reporting period. International accounting standards like IAS 21 provide guidance on foreign currency transactions and translation of financial statements.

1. Comparative International
Accounting
Topic Name: Foreign Currency Translation
Prepared By: Submitted To:
HITESH VAZA AMI PANDYA
VIDHI
Submitted To:
Department of Business Administration
Maharaja Krishnakumarsinhji University,
Bhavnagar

2. Introduction
Process whereby financial data expressed in terms of one
currency is restated in terms of another.
Foreign currency translation is about converting the figures
related to accounting stated as per one particular currency to
another currency to meet the finance reporting related
requirements. As per the United States Generally
Accepted Accounting Principles regulations, the items in the
balance sheet are converted in accordance with the rate of
exchange as on the date of balance sheet, whereas items in the
income statement are converted in accordance with the weighted-
average rate of exchange for that particular year. The losses and
profits that are derived as a result of the converting are showcased
in the equity category of the owner in the form of a separate item.

3. Definition
‘The Effects of Changes in Foreign Exchange
Rates’ lays down the manner in which foreign
currency transactions as well as operations
should be accounted in the finance related
statements.

4. The translational problem
• Two type of translation problem
1) Which rate of exchange should be used to
translate the foreign currency value of assets
and liabilities: the historical rate or the
closing rate?
2) if the second rate is used, how should the
change in the translated value of the assets
(the gain/loss on translation) be reported in
the financial statement?

5. Translation of transaction
• The ‘translation of transactions’ concerns
essentially the treatment of foreign currency
transactions in the books of account and the
financial statement of the individual company.
The books of account are, of course,
denominated in the company’s currency.
• Translation at the current exchange rate is also
consistent with general valuation principle.
• Non-monetary assets are entered in the books of
account at their historical cost in terms of home
currency.

6. Three different way in which monetary
assets and liability
• At the historical rate
• At the closing rate
• At the lower of the historical rate and the
closing rate for assets.

7. The ‘accruals principle’ versus the
‘prudence principle’
• Accruals principle
“account must be taken of income and charges relating
to the financial year, irrespective of the date of receipt or
payment”
For e.g.

8. • Prudence principle
“The realization of these monetary
assets/liabilities in terms of (home) cash
cannot be assessed with reasonable
certainty.”
“A future change in exchange rates may
well cancel out a gain made in the current
period. Hence it would be imprudent to report
this gain; as it is unrealized, it ma well
disappear in the future.”

9. Temporal method versus the closing
rate methods
• Rule 11 of the International Accounting Standards Board
sets forth an acceptable methodology for currency
translation.
1. Closing Rate Translation Method
2. Current/Non Current Rate Translation Method
3. Monetary-Nonmonetary Translation Method

10. FAS 8
In October 1975 it issued ‘Statement of Financial
Standards board No. 8 (FASB 1975) which made
the use of the temporal method.
(i.e. the application of the temporal principle)

11. The temporal method versus the
closing rate method
• Under current value accounting, when the
two method would give the same result.
• The closing rate method, when applied to an
assets stated in the foreign subsidiary’s
balance sheet at historical cost, produces a
translated figure that has no meaning.

12. FAS 52
• The financial accounting standard board issued
statement 52, foreign currency solution, in December
1981. also known as accounting standard codification
830, FAS 52 provides guidance on handling transaction
and reporting that involves foreign currencies.
 There are two main operation are a direct and integral
component or extension of the of the parent
company’s operation
 where the foreign entity operates in a ‘highly
inflationary’ economy

13. IAS 21
• The purpose of IAS 21 is to set out how to
account for transaction in foreign currencies
and foreign operation. The standard shows
how to translate financial statement into a
presentation currency, which is the currency in
which the financial statement are presented.

14. The triumph of the closing rate
method
• It is now over a decade since the basic rules of
foreign currency translation were laid down in FAS 52
(1981), SSAP 20 (1983) And IAS 21 (1983).

15. Translation of the profit and loss
account
• The temporal method
two element of require of special attention:
1. Depreciation
2. Cost of goods sold

16. • The closing rate method
This is one of the main point of difference
between SSAP 20 and FAS 52.
• Accounting for translation gain and losses
1. Extraordinary item in the income statement
2. Reserves in the balance sheet