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 currencies.
 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

1. Determine
5. local currency
Record gains and losses
that result from the
currency translation.

2.
Determine the
functional currency

4.
Re measure the financial
statements of the foreign
entity into the functional
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 approach Double transaction 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 TO BE TREATED AS CURRENT

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

SINGLE RATE APPROACH MULTIPLE RATE APPROACH

CURRENT/NON MONETARY/NON- TEMPORAL

CURRENT METHOD MONETARY METHOD METHOD
CURRENT RATE METHOD
 TYPES OF TRANSLATION
RATES
HISTORIC CURREN AVERAG
AL RATE T RATE E RATE
It is the exchange It is a simple or
●
●
It is the
●
weighted average
rate prevailing when
a foreign currency exchange rate of either historical
asset was first prevailing as or current
acquired, or a foreign exchange rate for
currency liability was
of the financial
the whole
first incurred.  statement date. accounting year.
 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 year)
Ex cash and cash
equivalents, accounts
receivable, and inventories
ITEMS
(of which full value is not
realized within accounting
year)
Ex. Patents, investment in
other companies, PPE

AT CURRENT AT HISTORICAL
EXCHANGE RATE EXCHANGE 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:

Monetary items Non-monetary items

such as cash on hand and accounts which include things such as

receivable and payable fixed assets- property, plant, and
equipment and inventory

CURRENT HISTORICAL
EXCHANGE EXCHANGE
RATE RATE
SUMMARY : TEMPORAL
METHOD
 WHEN TO USE CURRENT/
TEMPORAL METHOD
FROM FUNCTIONAL
CURRENCY TO
PRESENTATION
CURRENCY

CURRENT TEMPORAL
METHOD METHOD
FROM LOCAL
CURRENCY TO
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.

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”