Essay about Foreign Currency Translation

4617 Words Aug 5th, 2011 19 Pages
I. Introduction 2
II. Definition 3 A. Difference between translation and conversion 3 B. Role of FASB No. 52 4 1. Determine the functional currency: 4 2. Determine whether the functional currency of the subsidiary is also its home currency. 4 a) If the functional currency is the home currency, 4 b) If the functional currency of the subsidiary is not its home currency, 5
III. Reasons for Translation 5 A. Recording direct business transactions 5 B. Reporting operations conducted through a foreign enterprise 6 C. Measuring the enterprise exposure to the effects of currency fluctuation 7 D. Communicating with foreign audiences-of-interest 7
IV. Financial statement effects of alternative translation rates 7
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While companies’ activities are international, the currencies in which business contracts are contracted and settled are still a national affair.
Hence, due to international activities, companies hold many items that are denominated in foreign currencies.
For financial reporting purposes, these items have to be translated to a single currency, for example, the currency of a company’s home country.
Various translation methods have been created, but the main question when doing so is which exchange rate shall be used for the translation process.
Items could be translated into another currency by using the exchange rate of the transaction date, by using the exchange rate of the reporting-day (e.g. the balance sheet day), by using average exchange rates or any other kind of exchange rates.
When translating an item using different exchange rates, exchange differences arise. These exchange differences could be treated in different ways. They could either be recognized in the income statement, although gains or losses arising from items denominated in foreign currencies might not be realized yet, or exchange differences could initially be realized in equity and be transferred to profit or loss when they are realized. In addition, the economical effects have to be regarded to make sure, that exchange differences are treated in a way, which insures fair presentation of financial