Foreign Currency Translation

ACCOUNTING FOR
CURRENCY
TRANSLATION
(MAIN ISSUE: WHICH EXCHANGE RATE TO USE AND HOW
TO RECOGNIZE THEM IN FINANCIAL STATEMENTS)
BY: ANMOL GULATI

(2013360)
BACKGROUND
 Global cooperation being conducted in the absence of

currency or common unit of accounts have created a need of
an accounting that deals with CURRENCY TRANSLATION.
They are required to prepare consolidated financial statement in

which the results of both domestic & foreign cooperation are to
be incorporated, face a specific problem with the component
of financial statement, as they are denominated in different
What Is Foreign Currency
Translation?
The process by which a foreign subsidiary converts its financial
statements to the presentation currency, in preparation for
financial statement consolidation with the parent company in
conducting translation.
 The company must determine: The exchange rate to be used for

translating different financial statement line items.
Foreign Currency Translation Process
5.
Record gains and losses 1. Determine
that result from the local currency
currency translation.
4. 2.
Re measure the financial statements of the Determine the functional
foreign entity into the functional currency currency
3.
Determine to report
currency
TRANSLATION RISK
 Translation risk/translation exposure are
corporate treasury concepts used to define the
risks posed by exchange rate volatility to the
value of a company’s foreign assets and
liabilities.
 Since exchange rates fluctuate continuously,

this triggers foreign currency risk at the
accounting level as it causes the value of assets
to go up or down. This, in turn, generates FX
gains and losses that may distort the
company’s overall performance.
ACCOUNTING TREATMENT OF
EXCHANGE DIFFERENCES
 For instance, when an Indian company which buys good from
U.S.A, is required to make payment in $.
 While recording transactions, Indian company has to translate the
value of transaction in its own currency by usually using a spot
rate prevailing on the date of transaction.
 But if the exchange rate changes at the time of settlement, the

value will differ, hence requires an
ACCOUNTING TREATMENT OF THE DIFFERENCE
THREE DATE CYCLE
 The accounting issues concerning to international
events revolve around the important date related
with the transaction. For this there is a 3 date cycle
as follows:-
1) Firstly, the date on which transaction is initiated.

2) Secondly, an interim reporting date.
3) Finally, the date of settlement.
ACCOUNTING
TREATMENT OF
EXCHANGE
DIFFERENCES
Single transaction Double transaction

approach approach
SINGLE TRANSACTION APPROACH
 It is based on the premise that any transaction and

its settlement is a SINGLE EVENT.
 If any exchange difference is there that may be

charged to cost of good purchased or to an export
sale.
DOUBLE TRANSACTION APPROACH
 In contrast to single transaction approach, Dual transaction

approach considers exchange element separately,
 In other words, purchase or sale is recorded in the books of accounts

at the exchange rate prevailing at the date of transaction and
adjustments are not made for any change in exchange rates.
These changes in exchange rates on different dates are treated as

expenses and charged to loss on foreign exchange account.
ACCOUNTING FOR CURRENCY
TRANSLATION: FINANCIAL STATEMENT
Let us make in-depth study of the accounting for currency
translation.
 Translation problem arises on account of the system of flexible

exchange rates now prevalent.
 Accountants, these days are facing two types of problems in relation
to translation.
i. One is translation process.
ii. Translation differences to be accounted for.
FOR EXAMPLE,
 For instance US branch of an Indian Company buys an asset costing:-
 $ 2000 on 31, December 2010
 when the rate of exchange was 1$ = 45 INR.
 A year later on 31st December 2011, the branch still held the asset and it
is shown in balance sheet at its historical cost of
$ 2000 & the exchange rate was 1$ = 48 INR.
While showing the financial statements of the US Branch, the Indian company
will face with following two problems.
Problems are :
What value should be shown for the asset in the balance
sheet?
2
1 Asset can be shown :
Asset can be shown : at the balance sheet date
at the Date of acquiring it At prevailing rate
by translating the amount At the end of accounting
into period
INR i.e INR i.e
$2000@45 = RS. 90,000 $2000@48 = RS.96,000
TO BE TREATED AS HISTORICAL RATE TO BE TREATED AS CURRENT RATE

PROBLEM ARISES : HOW TO DEAL WITH DIFFERENCE OF RS.
6,000 ?
Accounting FOR CURRENCY

TRANSLATION
SINGLE RATE MULTIPLE RATE APPROACH

APPROACH
CURRENT
RATE
METHOD CURRENT/NON
CURRENT MONETARY/NON-
METHOD MONETARY
METHOD TEMPORAL
METHOD
TYPES OF TRANSLATION RATES
HISTORICAL CURRENT RATE AVERAGE RATE
RATE
• It is the • It is the • It is a simple or
exchange rate exchange rate weighted
prevailing prevailing as average of
when a foreign of the financial either historical
currency asset statement or current
was first date. exchange rate
acquired, or a for the whole
foreign accounting
currency year.
liability was
first incurred.
1.CURRENT/NON-CURRENT METHOD
 Under this method balance sheet items are classified as:
CURRENT ITEMS NON-CURRENT

(items that are usually
converted into cash within a
ITEMS
year) (of which full value is not
realized within accounting
Ex cash and cash year)
equivalents, accounts
receivable, and inventories Ex. Patents, investment in
other companies, PPE
AT CURRENT EXCHANGE AT HISTORICAL EXCHANGE

RATE RATE
2. CURRENT RATE APPROACH
 It applies a single exchange rate , the current or closing

rate , to all foreign currency assets.
 Also known as SINGLE RATE APPROACH
 This approach treats foreign operations as if they existed

separately and apart from the parent company.
EXCEPTION : TREATMENT OF EQUITY
The equity will always be calculated at the historical rate, which is the
original rate.
For example,
If you are translating the share capital, the historical rate for share capital
would be the exchange rate on the day when those shares were issued.
EXCEPTION :
REVENUE AND EXPENSES
All revenues and expenses, COGS,
depreciation, and
amortization are
translated by an
appropriate weighted
average of currency
exchange rates for the period.
SUMMARY:
CURRRENT RATE METHOD
3. TEMPORAL METHOD
Here’s a brief breakdown of how this works:
• This method is usually consistent with the monetary/non-
monetary method. It includes following:
Non-monetary items
which include things such as fixed
assets- property, plant, and
equipment and inventory
CURRENT
EXCHANGE RATE
SUMMARY : TEMPORAL METHOD
If Local Currency =
Functional Currency
≠ Presentation
Currency
CURRENT METHOD
$ = $ ≠ INR
FROM FUNCTIONAL
WHEN TO USE CURRENCY TO PRESENTATION
CURRENT/ CURRENCY
TEMPORAL
If Local Currency ≠
METHOD Functional Currency
= Reporting
Currency
TEMPORAL METHOD
$≠$ =
FROM LOCAL CURRENCY TO INR
FUNCTIONAL CURRENCY
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT
 When cash flows are translated from the local currency into the currency used
for financial reporting, the translation may result in a gain or loss.
 Recognizing the gain or loss is commonly referred to as a
Currency Translation Adjustment (CTA).
 They also create more fluctuation in financial results.
If translations between currencies are not hedged, they can create large
financial losses. Losses occur if there is a large fluctuation in the currency
exchange rate.
CONVERSION OF
TRIAL BALANCE FROM
FOREIGN CURRENCY TO
REPORTING CURRENCY
(CERTAIN RULES OF CONVERSION ARE FOLLOWED)
RULES FOR CONVERSION
If the exchange rate is subject to frequent and violent fluctuations

then under mentioned rules should be followed for conversion:
1. Fixed assets must be converted at the rate of exchange
prevailing on the day when these assets were bought or on
the date of contract.
2. Fixed liabilities should be converted at the exchange rate
ruling on the day when liabilities were incurred.
3. Current assets or liabilities should be converted at the
exchange rate prevailing on the last day of the period.
CONT…..
4. Revenue items should be converted at average rate ruling during
the period under review.
After converting all the figures as above, a new trial balance can
be prepared if some differences are there , that differences can
be placed to new account under the head
“DIFFERENCES IN EXCHANGE ACCOUNT”

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ACCOUNTING FOR

BY: ANMOL GULATI

 Global cooperation being conducted in the absence of

They are required to prepare consolidated financial statement in

 The company must determine: The exchange rate to be used for

 Since exchange rates fluctuate continuously,

 But if the exchange rate changes at the time of settlement, the

1) Firstly, the date on which transaction is initiated.

Single transaction Double transaction

 It is based on the premise that any transaction and

 If any exchange difference is there that may be

 In contrast to single transaction approach, Dual transaction

 In other words, purchase or sale is recorded in the books of accounts

These changes in exchange rates on different dates are treated as

 Translation problem arises on account of the system of flexible

 For instance US branch of an Indian Company buys an asset costing:-

 $ 2000 on 31, December 2010

 when the rate of exchange was 1$ = 45 INR.

$ 2000 & the exchange rate was 1$ = 48 INR.

TO BE TREATED AS HISTORICAL RATE TO BE TREATED AS CURRENT RATE

Accounting FOR CURRENCY

SINGLE RATE MULTIPLE RATE APPROACH

 Under this method balance sheet items are classified as:

CURRENT ITEMS NON-CURRENT

AT CURRENT EXCHANGE AT HISTORICAL EXCHANGE

 It applies a single exchange rate , the current or closing

 Also known as SINGLE RATE APPROACH

 This approach treats foreign operations as if they existed

monetary method. It includes following:

If the exchange rate is subject to frequent and violent fluctuations

4. Revenue items should be converted at average rate ruling during

the period under review.

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