fas52

Foreign currency Concepts

Foreign Currency Translations

Functional currency--what is it?

The currency of the primary economic environment in which the entity operates; normall, that is the currency of the evironment in which an entity primarily generates and expends cash.

Translation methods

current rate method--mandated by the FASB in SFAS No. 52 when the functional currency is the foreign currency.

Monetary/nonmonetary method-- Sometimes called the remeasurement method. Required by SFAS No. 52 when the foreign entity's books are not maintained in the functional currency.

temporal method--translates cash, receivables, payables, and assets carried at present or future values at the current rate, with remaining assets and liabilities carried at the applicable historical rates. (discussed and required in SFAS No. 8)

current/noncurrent method--stresses balance sheet classification as the basis for translation. Current assets and liabilities are translated at the current rate and noncurrent assets and liabilities at the applicable historical rates.

If the foreign currency of the subsidiary is the functional currency:Use the current rate method.

All assets and liabilities are translated using the current exchange rate at the balance sheet date.

All revenues and expenses should be translated at the rates in effect when these items are recognized during the period (simplified by using weighted average rates for the year)

Stockholders equity accounts are translated by using historical exchange rates

Common stock--at the rate when the stock was issued.

Retained earnings--weighted average rate applied to revenue and expenses and the specific rate in effect when dividends were declared.
translation adjustments

result from translating assets and liabilities at current rates while owners' equity is translated by using historical rates and income statement items are translated by using weighted average rates.
cumulative balance of translation adjustments is reported as a component of accumulated other comprehensive income in the stockholders equity section of the US parent's consolidated balance sheet.

If the US dollar is deemed to be the functional currency:

must remeasure foreign currency financial statements into US dollars. Makes translation adjustments unnecessary. (similar to the temporal method recommended by SFAS No. 8.)

one exception: Deferred taxes under this remeasurement approach are considered to be monetary and are translated at the current rate. Under SFAS No. 8, they were translated by using historical rates.

Foreign Currency Transactions

Foreign currency transaction-- a transacton denominated in a currency other than the entity's functional currency.
demoninated--the amount to be received or paid is fixed in terms of the number of units of a particular foreign currency regardless of changes in the exchange rate.

For a US company, foreign currency transactions result from importing or exported goods or services or making a loan involving a foreign entity and agreeing to settle the transaction in a currency other than the US dollar.

Measure a foreign currency transaction at the dollar equivalent at the date of the transaction. Use the spot currency rate on that date.

If financial statements are prepared between the transaction date and the settlement date, all receivables and liabilities mustbe restated to reflect the spot rates in existence at the balance sheet date. Gains and losses will result if the spot rate has changed.

At the settlement date, the spot rate is used to determine the value of the foreign currency recieved.