Foreign Currency Translation
Foreign currency translation converts the financial statements of a foreign subsidiary from its functional currency to the parent's reporting currency using the current rate method or temporal method.
Explanation
The functional currency is the currency of the primary economic environment in which the entity operates. When the functional currency is the local currency, the current rate method is used: assets and liabilities at the current exchange rate, equity at historical rates, and income/expense at weighted-average rates. The resulting translation adjustment is reported in OCI.
When the functional currency is the reporting currency (or in hyperinflationary economies), the temporal method is used: monetary items at current rates, non-monetary items at historical rates, and the resulting remeasurement gain or loss is reported in net income. Transaction gains and losses from foreign-currency-denominated transactions are also recognized in income.
Key Points
- •Current rate method: all assets/liabilities at current rate, translation adjustment in OCI
- •Temporal method: monetary at current, non-monetary at historical, gain/loss in income
- •Functional currency determines which method to use
- •Foreign currency transactions create gains/losses in net income
Exam Tip
Know which method to use based on the functional currency designation, and where the resulting adjustment is reported (OCI vs. income).
Frequently Asked Questions
Related Topics
Comprehensive Income
Comprehensive income includes all changes in equity during a period except those from owner transactions, encompassing net income plus other comprehensive income (OCI) items.
Consolidations
Consolidation is the process of combining the financial statements of a parent company and its subsidiaries into a single set of financial statements, eliminating intercompany transactions and balances.
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
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