The document discusses foreign currency translation and remeasurement for financial reporting purposes. It identifies the functional currency as the primary currency of the economic environment in which an entity operates, and lists factors to consider in determining functional currency. Translation involves using the current exchange rate to convert a foreign subsidiary's functional currency financial statements into the parent's reporting currency. Remeasurement involves using historical and temporal exchange rates to convert a foreign entity's transactions and balances into its functional currency, which is then translated if different from the parent's reporting currency. The key difference is the exchange rates used in each method.

1. Foreign Currency
Financial Statements
ARTHIK DAVIANTI

2. Identifying the factors that
should be considered when
determining an entity’s
functional currency

3. Functional Currency Concept
Functional currency:
The currency of the primary economic environment
in which an entity operates.
Factors for determining functional currency – US
GAAP:
1. Cash flow of assets and liabilities foreign entity –
denominated and settled in the foreign currency,
functional currency: local currency.
2. Sales price is determined by local competition or
local government, functional currency: local.
3. Sales market in the parent company’s country –
denominated in the parent’s currency, functional
currency: parent’s currency.

4. Functional Currency Concept
Factors for determining functional currency
(continue):
4. Expenses (labor and material) are provided in
local costs – the functional currency: foreign
currency.
5. Financing is dominated in the foreign entity’s
local currency – the functional currency: foreign
currency.
6. High volume of intercompany transactions and
arrangements – functional currency: parent’s
currency.

5. Terms
Foreign currency: a currency other than the entity’s
functional currency.
Local currency: the currency of the country to which
the reference is made.
The reporting currency: the currency in which the
consolidated financial statements are prepared.
Foreign currency statements: statements prepared in
a currency that is not the reporting currency of the
parent investor.

6. Mata Uang Fungsional
Mata Uang Fungsional – PSAK 10, paragraf 9:
Menentukan mata uang fungsional:
a) Mata uang (1) yang mempengaruhi harga jual barang
dan jasa; dan (2) dari negara yang kekuatan persainan
dan pengaturannya sebagian besar menentukan
harga jual barang dan jasa entitas.
b) Mata uang yang paling mempengaruhi biaya tenaga
kerja, bahan baku, dan biaya lain dari pengadaan
barang atau jasa.
Paragraf 10: bukti mata uang fungsional (a) mata uang
sumber dana, (b) matauang sumber penerimaan
aktivitas operasi.

7. Determining the Functional
Currency
Two major issues that must be addressed when
financial statements are translated from a foreign
currency into U.S. dollars (local currency):
• Which exchange rate should be used to translate foreign
currency balances to domestic currency?
• How should translation gains and losses be accounted
for? Should they be included in income?
Date
Currency on
Deposit
Current
Exchange Rate
Dollar
Equivalent
12/31/20X1 £100 $1.80 $180
12/31/20X2 £100 $1.70 $170

8. Determining the Functional
Currency
Exchange rates that may be used in converting
foreign currency values to the U.S. dollar:
• The current rate
• The historical rate
• The average rate for the period

9. Determining
the Functional Currency
• “The currency of the primary economic
environment in which the entity operates;
normally that is the currency of the environment
in which an entity primarily generates and receives
cash”
• Used to differentiate between foreign operations
that are self-contained and integrated into a local
environment, and those that are an extension of
the parent and integrated with the parent

10. Functional Currency Indicators

11. Functional Currency Indicators
Functional currency designation in highly inflationary
economies
• The volatility of hyperinflationary currencies
distorts the financial statements if the local
currency is used as the foreign entity’s
functional currency
• In such cases, the reporting currency of the U.S.
parent (parent’s reporting currency)—the U.S.
dollar—should be used as the foreign entity’s
functional currency

12. Understand and explain the
differences between
translation and
remeasurement.

13. Methods
Methods for converting the foreign subsidiary’s
financial statement (foreign entity’s functional
currency:
1. If the functional currency is the parent’s currency,
the foreign financial statements are remeasured
into the parent’s currency using the temporal
method.
2. If the functional currency is the local currency of
the foreign entity, the foreign financial statements
are translated into the parent’s currency using the
current rate method.

14. Translation Versus Remeasurement of
Foreign Financial Statements
Methods used to restate foreign entity statements to
U.S. dollars (parent):
1. The translation of the foreign entity’s functional
currency statements into U.S. dollars (parent)
2. The remeasurement of the foreign entity’s
statements into the functional currency of the
entity
• After remeasurement, the statements must
then be translated if the functional currency is
not the U.S. dollar.
• No additional work is needed if the functional
currency is the U.S. dollar

15. Translation Versus Remeasurement
Summary for U.S. Parent Companies:
If LC = FC  Translate to U.S. Dollars
If LC ≠ FC  Remeasure to FC
• If FC = U.S. Dollars, no further work is needed
(this is the case for hyperinflationary
currencies)
• If FC ≠ U.S. Dollars  Translate to U.S. Dollars
LC = Local Currency
FC = Functional Currency

16. Translation Versus Remeasurement
Patriot Corp, a US company has a wholly owned
subsidiary, Regal Corporation, operates in UK.
Translation/remeasurement possibilities are:
Functional
Currency
Currency for
Accounting
Records
Required Procedures for
Consolidating or
Combining
Case 1 British pounds British pounds Translation
Case 2 US dollar British pounds Remeasurement
Case 3 Euro British pounds Remeasurement and
translation
The exchange rate to be used for remeasurement and
translation in Exhibit 14-11 (Beams et al. 2012, p. 490).

17. Intercompany Foreign Currency
Transactions
Foreign currency transactions – receivable or payable
balances denominated in a currency other than the
entity’s (parent’s or subsidiary’s) functional currency.
Illustration: A US parent company borrows $1,600,000
(£1,000,000) from its British subsidiary.
Loan
Denominated
Currency
Functional
Currency of
Subsidiary
Foreign Currency
Transaction of
Subsidiary? Parent?
Case 1 British pounds British pounds No Yes
Case 2 British pounds US dollar Yes Yes
Case 3 US dollar British pounds Yes No
Case 4 US dollar US dollar No No

18. Translation

19. Illustration: Background
Information
• Pat Corp, a US firm, paid $525,000 cash to acquire
all Star Company’s stock (a British firm).
• The business combination was established on
December 31, 2011, when exchange rate was $1.50.
• During 2012, the British pound weakened against US
dollar – year-end current exchange rate was $1.40.
• Average exchange rate for 2014 were $1.45.
• Star paid £30,000 dividend on December 1, 2012,
when exchange rate was $1.42 (US) per British
pound.

20. Item
British
Pounds
Exchange
Rate £/$
US
Dollars
Assets
Cash 140,000 1.50 210,000
Account receivable 40,000 1.50 60,000
Inventory (cost) 120,000 1.50 180,000
Pland assets 100,000 1.50 150,000
Less: Accumulated depreciation (20,000) 1.50 (30,000)
Total assets 380,000 570,000
Equities
Account payable 30,000 1.50 45,000
Bonds payable 100,000 1.50 150,000
Capital stock 200,000 1.50 300,000
Retained earnings 50,000 1.50 75,000
Total equities 380,000 570,000

21. Intercompany Transaction
• Non-interest bearing advance by Star to Pat on January
4, 2012, for $84,000, when exchange rate was $1.50.
• Star’s adjusted trial balance at December 31, 2012,
reflects advance to Pat £60,000, and the exchange gain
£4,000.
• Entry on Star’s books:
Advance to Pat (+A) £4,000
Exchange gain (+Ga, +SE) £4,000
To adjust receivable denominated in dollars [($84,000/$1.40) - £56,000 per
books]

22. Translating the Foreign Subsidiary’s
Adjusted Trial Balance
• Pat translates Star’s adjusted trial balance at
December 31, 2012, into US dollars before it
accounts for its investment in Star.
• Assets and liabilities – balance sheet date’s currency
• Capital stock and other paid in capital – historical
currency (when subsidiary is acquired)
• Income statement’s items – average exchange rate
• Translation of foreign subsidiary accounts into US
dollars in Exhibit 14-2 (Beams et al. 2012, p. 494)
• Translated financial statements in Exhibit 14-3
(Beams et al. 2012, p. 495)

23. Equity Method of Accounting
• Pat records the investment in Star at its $525,000
fair value on December 31, 2011.
• Star’s translated financial statement are used by Pat
in applying the equity method.
• The entry to record receipt of the £30,000 or
$42,600, dividend from Star on December 1, 2012.
• Exchange rate was $1.42 when dividend was paid.
Cash (+A) £42,600
Investment in Star (-A) £42,600

24. Equity Method of Accounting
• Pat recognizes its equity in Star’s income from 2012
in an entry that also recognized Star’s unrecognized
loss on translation.
• Pat recognizes 100% of Star’s 2012 net income in
dollars, and it includes the $28,600 loss from
translation – in other comprehensive income.
• The reported income $121,800 less lost on
translation $28,600 equals $93,200 investment
increase.
• The entry for 2012:
Investment in Star (+A) $93,200
Other comprehensive income: equity adjustment
on translation (-SE) 28,600
Income from Star (R, +SE) 121,800

25. Illustration (continues)
• Amortization when excess of fair value over book
value is allocated to identifiable assets and
liabilities: patent amortization
• Pat paid $525,000 for its investment in Star.
• Star’s book value and the fair value of its net assets
acquired was equal to $375,000
• $150,000 excess of cost over net asset book value is
all allocable to a patent (no book value because it
was internally developed).
• Under current rate method – patent-related
calculation is based on local currency units (British
pound).

26. Illustration (continues)
• Calculate patent amortization – convert $150,000
allocated to the patent at acquisition into pound,
$150,000 = £100,000
• Amortization 2012
= £100,000 : 10 years X $1.45 average rate 2012
= $14,500
• Equity adjustment – patent:
£10,000 amortization X ($1.45 - $1.50) exchange rate
decline to midyear $500
£10,000 unamortized patent X ($1.40 - $1.50) exchange
rate decline for the year 9,000
Equity adjustment 9,500

27. Illustration (continues)
• Recorded as follows:
Income from Star (-R, -SE) $14,500
Other comprehensive income: Equity adjustment
on translation (-SE) 9,500
Investment in Star (-A) $24,000
• Investment summary:
Investment cost December 31, 2011 $525,000
Less: Dividends received 2012 (42,600)
Add: Equity in Star’s net income 121,800
Less: Unrealized loss on translation (28,600)
Less: Patent amortization (14,500)
Less: Unrealized translation loss on patent (9,500)
Investment balance December 31, 2012 $551,600

28. Consolidation
• Pat reports income from Star of $107,300. It is a
share of Star’s reported income, $121,800, less the
amortization of the unrecorded patent, $14,500.
• Pat also has a $38,100 equity adjustment balance,
equals Star’s equity adjustment of $28,600.
• $9,500 equity adjustment for the unrecorded
patent, recorded by Pat.
• Working paper in Exhibit 14-4 (Beams et al. 2012
p. 498)

29. Equity Method of Accounting
• Working paper entry as follows:
a. Income from Star (-R, -SE) $107,300
Dividends (+SE) $42,600
Investment in Star (-A) 64,700
• Entry b eliminates reciprocal equity investment at
beginning of period and enters the beginning of
patent balance.
b. Retained earnings (-SE) $75,000
Capital stock – Star (-SE) 300,000
Patent (+A) 150,000
Investment in Star (-A) $525,000

30. • Entry c adjusts the Investment in Star account for
unrealized translation losses, eliminates the
unrealized translation loss for the patent, and ‘
equity eliminates Star’s remaining stockholders
account – the equity adjustment from translation
account.
c. Investment in Star (+A) $38,100
Patent (-A) $9,500
Other comprehensive income: equity
adjustment from translation – Star (+SE) 28,600
• The current patent-amortization expense (£10,000 X
$1.45 average exchange rate) and reduces the
patent to $126,000 – unamortized amount at year
end (£90,000 X $1.40 exchange rate).

31. Remeasurement

32. Remeasurement
• Remeasurement is similar to translation in that its
goal is to obtain equivalent U.S. dollar values for
the foreign affiliate’s accounts so they may be
combined or consolidated with the U.S.
company’s statements
• The exchange rates used are different from those
used for translation

33. Remeasurement
• The process produces the same end result as if
the foreign entity’s transactions had been initially
recorded in dollars
• Because of the variety of rates used, the debits
and credits of the U.S. dollar–equivalent trial
balance will probably not be equal
• The balancing item is a remeasurement gain or
loss, which is included in the period’s income
statement.

34. Remeasurement
Statement presentation
• Remeasurement gain or loss is included in the
current period income statement, usually under
“Other Income”
• Upon completion of the remeasurement process,
the foreign entity’s financial statements are
presented as they would have been had the U.S.
dollar been used to record the transactions in the
local currency as they occurred
Illustration: Beams et al. (2012, p. 499-503)

35. Monetary Accounts
Monetary  Related to “Money”
By definition:
• Monetary accounts are those that have their amounts
“fixed” in terms of the units of currency.
• They represent amounts that will be received or paid in
a fixed number of monetary units.
Generally, they include:
• Cash and cash equivalents
• Receivables (short- and long-term)
• Payables (short- and long-term)

36. Nonmonetary Accounts

37. Summary of the Translation and
Remeasurement Processes

38. Source:
BAKER, CHRISTENSEN, & COTTLRELL
Advanced Financial Accounting 9th
BEAMS, ANTHONY, BETTINGHAUS, & SMITH
Advanced Financial Accounting 11th