Posts Tagged ‘transactions


A Summary of Foreign Currency Accounting

Foreign currency accounting and reporting can be broken into two categories: foreign currency transactions and foreign currency translation. Transaction guidance covers how to account for transactions denominated in a foreign currency. Translation guidance describes how to convert an entire set of books to a new reporting currency (for example when consolidating a foreign subsidiary)

Key Definitions

Functional Currency – the currency in which most of en entireties transactions are denominated.

Reporting Currency – The currency in which an entity reports its financial statements

Local Currency – the currency of a particular country being referenced.

Foreign Currency Transactions (ASC 830-20)

Most entities report in their functional currency. In these cases, when the organization enters into a transaction denominated in a currency other than its functional currency, it must initially measure the related assets, liabilities, revenue or expenses in its functional currency at the date the transaction is recognized using the exchange rate in effect that date.

When an organization has assets or liabilities which are denominated in a currency other than its reporting currency, fluctuations in exchange rates lead to foreign currency transaction gains or losses. Let’s take a look at an example: Imagine a US based company whose functional and reporting currencies are both the US Dollar has one bank account denominated in Canadian Dollars. Every month when the company closes its books it will mark the Canadian Dollar bank account to USD using the rate at the end of the month. This will almost certainly result in a gain or a loss even if there was no other activity in the account.

Foreign Currency Translations (ASC 830-30)

When consolidating foreign subsidiaries, a different type of foreign currency gain/loss occurs.  When subsidiaries are converted to reporting currency year over year there is also a gain or loss which occurs due to the fluctuation of exchange rates.

GAAP instructs practitioners to convert balance sheet accounts using the exchange rate at the balance sheet date. Income Statement transactions are to be converted using the exchange rate in effect on the recognition date for each transaction. (The FASB acknowledges that not all organizations have the systems, and processes in place to capture transaction date exchange rates for all income statement items. As a result, it is acceptable to utilize an appropriated weighted average exchange rate for the reporting period when converting income statement items).



October 2018
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