This document provides guidance on translating foreign currency financial statements into a reporting currency. It discusses two main methods:
1. Current/closing rate method - Translates all balance sheet items using the current exchange rate, except for equity accounts which use historical rates. Translation gains/losses are reported as other comprehensive income.
2. Remeasurement (temporal) method - Translates monetary items at the closing rate, non-monetary items at either historical or fair value rates depending on when they were initially recorded. Translation gains/losses impact net income.
The document then provides detailed examples of how specific asset, liability, equity and income statement accounts would be translated under each method based on whether they are monetary or non-
This document provides guidance on translating foreign currency financial statements into a reporting currency. It discusses two main methods:
1. Current/closing rate method - Translates all balance sheet items using the current exchange rate, except for equity accounts which use historical rates. Translation gains/losses are reported as other comprehensive income.
2. Remeasurement (temporal) method - Translates monetary items at the closing rate, non-monetary items at either historical or fair value rates depending on when they were initially recorded. Translation gains/losses impact net income.
The document then provides detailed examples of how specific asset, liability, equity and income statement accounts would be translated under each method based on whether they are monetary or non-
This document provides guidance on translating foreign currency financial statements into a reporting currency. It discusses two main methods:
1. Current/closing rate method - Translates all balance sheet items using the current exchange rate, except for equity accounts which use historical rates. Translation gains/losses are reported as other comprehensive income.
2. Remeasurement (temporal) method - Translates monetary items at the closing rate, non-monetary items at either historical or fair value rates depending on when they were initially recorded. Translation gains/losses impact net income.
The document then provides detailed examples of how specific asset, liability, equity and income statement accounts would be translated under each method based on whether they are monetary or non-
This document provides guidance on translating foreign currency financial statements into a reporting currency. It discusses two main methods:
1. Current/closing rate method - Translates all balance sheet items using the current exchange rate, except for equity accounts which use historical rates. Translation gains/losses are reported as other comprehensive income.
2. Remeasurement (temporal) method - Translates monetary items at the closing rate, non-monetary items at either historical or fair value rates depending on when they were initially recorded. Translation gains/losses impact net income.
The document then provides detailed examples of how specific asset, liability, equity and income statement accounts would be translated under each method based on whether they are monetary or non-
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Foreign
Currency Translations Reported by:
Gwapa
Steps in the translation and
consolidation of foreign entity
1. Receive foreign entitys financial statements, which are reported in foreign
currency
2. Translate the statements in foreign currency to Philippine peso. Each foreign
entity account balance must be individually translated into its Philippine peso equivalent as follows:
Account in foreign currency units
Appropriate exchange rate
Account in Philippine peso equivalent value
3. Consolidate the translated foreign entitys accounts, which are now stated in Philippine peso, with the Philippine companys accounts
Comparison of the Two Methods
Balance Sheet
Current/Closing Rate Method
Remeasurement (temporal) Method
Monetary assets and
liabilities
Current/closing rate
Current/closing rate
Non-monetary items at historical cost
Current/closing rate
Historical rate
Non-monetary items at Fair value
Current/closing rate
Rate at the date of the
revaluation or fair value determination*
Capital stocks and preacquisition retained
earnings
Historical (or actual)
rate
Historical (or actual)
rate
Comparison of the Two Methods
Balance Sheet
Current/Closing Rate Method
Remeasurement (temporal) Method
Post-acquisition retained Earnings
Not translated using a
single exchange rate. This is a cumulative figure that is carried forward from year to year
Not translated using a
single exchange rate. This is a cumulative figure that is carried forward from year to year
Translation gains nor
losses
Other comprehensive income (FCT G/L)
Taken to income statement as gains or losses; remeasurement gain or loss arising from the revaluation of a non-monetary items is taken to OCI if the revaluation G/L are
Income Statement
Current/Closing Rate Method
Remeasurement (temporal) Method
Sales, purchases, expenses and income items that result to outflow or inflow of monetary items
Historical rate or actual
rate (average rate may be used for practical purposes)
Historical rate or actual
rate (average rate may be used for practical purposes)
Cost of Sales
Historical rate or actual rate at the date when inventory is sold or average rate if the cost of sales is evenly spread out
Historical rate or actual rate at the date when inventory is sold or average rate if the cost of sales is evenly spread out
Depreciation, amortization and any other allocation of nonmonetary items
Historical or actual rate at the date when the expense is incurred, or average if the expense is incurred evenly throughout the year
Historical rate of original acquisition (either at the date of purchase for historical cost items or the date of valuation for items carried at fair value)
Inventories (N) Carried at cost Carried at lower of cost or market
Current/Closing Method Exchange Rate
Temporal Method Exchange Rate
Current Current
Historical *
Prepaid insurance, advertising,
and rent (N)
Current
Historical
Prepaid interest (M)
Current
Current
Refundable deposits (M)
Current
Current
PPE (N)
Current
Historical
Accum. Depreciation on PPE
(N)
Current
Historical
Cash surrender value of life
insurance (M)
Current
Current
Patents, trademarks, licenses
and formulas (N)
Current
Historical
Goodwill (N)
Current
Historical
Other intangible assets (N)
Current
Historical
Assets
Current/Closing Method Exchange Rate
Temporal Method Exchange Rate
Deferred charges and credits,
except deferred income taxes and policy acquisition cost for life insurance companies (N)
Current
Historical
Deferred income taxes (N)
Current
Current
Liabilities
Current/Closing Method Exchange Rate
Temporal Method Exchange Rate
Accounts and notes payable
and overdrafts (M)
Current
Current
Accrued expenses (M)
Current
Current
Liability of refundable expenses (M)
Current
Current
Non-refundable deposits (N)
Current
Historical
Deferred income tax liabilities
(N)
Current
Current
Deferred/Unearned revenue (N)
Current
Historical
Other deferred credits (N)
Current
Historical
Bonds payable and other long
term debt (M)
Current
Current
Stockholders equity
Current/Closing Method Exchange Rate
Temporal Method Exchange Rate
Common stock (N)
Historical
Historical
Preferred stock carried at
issuance price (N)
Historical
Historical
Other paid-in capital (N)
Historical
Historical
Retained earnings (residual
amount)
Not translated
Not remeasured
The use of historical rates to translate capital stocks and pre-acquisition RE
serves its two purposes: 1. To ensure that in the consolidation worksheet, the share capital and RE will be cleanly eliminated against the cost of investment to arrive at goodwill as of the date of acquisition 2. To throw out the cumulative translation difference from the date of acquisition.
Income Statement related to monetary Items
Sales, purchase, expenses and income items that result to outflow or inflow of monetary items
Average
Average
Income statement items related to nonmonetary items
Cost of goods sold
Average
Historical
Depreciation on PPE
Average
Historical
Amortization of intangible items (e.g. patents)
Average
Historical
Amortization of deferred income taxes
Average
Current
Amortization of deferred charges and credits
Average
Historical
Amortization of policy acquisition costs for life
insurance companies
Average
Historical
BACK
Illustration: Translation of Foreign
Subsidiarys Financial Statement
Assume that on January 2, 20x4, P Company, a Philippine based
company, acquired for US$ 2,000,000 an 80% interest in S Company maintains its books in US dollars and they are in conformity with GAAP in the Philippines (parents functional and presentation currency is the peso). S companys financial statements are prepared in the local currency unit (the foreign currency unit dollars).
Exchange rate for the US dollars for the 20x4 fiscal year are as follows: Date
Spot Rate
January 2, 20x4 (date of acquisition)
40.00
September 1, 20x4
40.10
December 31, 20x4
40.25
Average for the fourth quarter
40.22
Average for the year
40.20
Translation into the presentation
currency (Current/Closing Rate Method)
Functional Currency is local Currency Unit US Dollars
Rates
Functional Currency is Local Currency Unit - US Dollars
Combined Statement of Transaction Adjusted Adjusted Trial Income and Retained Exchange Trial Balance Balance ($) Earnings Rate (Pesos) Sales
position during year: Net Income for the year Dividends declared
333,000 (300,000)
40.20 40.10
Net asset position translated using rate in
effect at the date of each transaction 12/31 Exposed net asset position Change in cumulative translation adjustment during the year -- net increase 1/2 Cumulative translation adjustment 12/31 Cumulative translation adjustment
69,600,000
13,386,600 (12,030,000) 70,956,600
1,773,000
40.25 71,363,250 406,650 0 406,650
Back
Condensed Balance Sheet for S Company on Jan 2, 20x4 :
Monetary assets - - - - - - - - 1,100,000
Monetary Liabilities - - - - - - - 1,800,000
Nonmonetary assets
Common stock - - - - - - - - - -
960,000
Paid-in capital in excess of par - - - - - - - - - - - -
300,000
Retained Earnings -- - - - - - - -
480,000
Inventory - - - - - - - - - - -
760,000
Fixed Assets - - - - - - - - - 1,680,000
Total
3,540,000
Total
Net Assets: 3,540,000 1,800,000 = $1,740,000
3,540,000
Statement of Comprehensive Income
S Company Statement of Comprehensive Income For the Year ended Dec. 31, 20x4 Net Income Other Comprehensive Income Comprehensive Income
P 13,386,600 406,560 P 13,379,250
S Company Statement of Shareholders Equity For the Year ended Dec. 31, 20x4 Common Stock Balance, 1/1/20x4 Comprehensive income: Net Income OCI
P 38,400,00
Paid-in Capital in excess of par
Retained Earnings
P 12,000,000
P 19,200,000
P 13,386,600
OCI
Total P0
406,650
P 69,600,000
P 13,386,600 406,650
Comprehensive Income
Dividends declared
P 83,393, 290 (12,030,00 0)
(12,030,000 )
Translation into the Functional
Currency (Remeasurement or temporal method)
Functional currency is Philippine peso
bbxnj Functional Currency is Local Currency Unit - US Dollars Combined Statement of Transaction Adjusted Adjusted Trial Income and Retained Exchange Trial Balance Balance ($) Earnings Rate (Pesos) Sales
3,020,000
Cost of Goods Sold
1,850,000
Depreciation Expense
100,000
Other Expenses
655,000
Income Tax Expense
40.20
H A A
schedule 40.00
40.20 40.20
3,296,400 13,575,200
82,000
NI before remeasurement loss
Remeasurement loss - Dr
121,404,000 74,201,400 4,000,000 26,331,000
201,850 13,373,350
0 H
40.00
Net Income to RE
333,000
Retained Earnings 1/1
480,000
Total Less: Dividends declared 9/1/20x4
813,000
12,030,000
300,000
20,543,350
19,200,000 32,573,350
US ($)
Translation Exchange Rate
Verification of the Translation
1/2 Exposed Net monetary liability 700,000 40.00 position adjustment (temporal method)
Reporting Currency (pesos) 28,000,000
Adjustments for changes in net monetary
position during the year: Less: Increase in cash and receivables from sales Add: decrease in monetary assets or increase in monetary liabilities Purchases Other Expenses Income Taxes Dividends declared
(3,020,000)
40.20
(121,404,000 )
1,920,000 655,000 82,000
40.20 40.20 40.20 40.10
77,184,000 26,331,000 3,296,400
300,000
12,030,000
Net monetary liability position translated
using rate in effect at date of each transaction Less: 12/31 Exposed net monetary liability position Remeasurement gain (loss)
25,437,400 637,000
40.25
25,639,250
BACK
Schedule: Translation of Cost of
goods Sold Accounts Beg inventory (assumed)
($) 760,000 H
40.00
40.20
Purchases (assumed) Total
Remeasureme nt exchange Pesos Rate 30,400,000
1,920,000
77,184,000
2,680,000
107,584,000
Less: Ending Inventory
40.22
830,000
33,382,600
1,850,00 0
74,201,400
Cost Of Goods Sold
bbbb
Balance sheet Cash
930,000
Accounts Receivable
608,000
Inventory (FIFO)
830,000
Land
500,000
Buildings (net)
650,000
Equipment (net)
430,000
Total
3,948,000
Accounts Payable Short-term notes payable Bonds payable Common stock, P10 par Paid-in Capital in excess of par
Problem 1 1. Certain balance sheet accounts of a foreign subsidiary of RR company have been stated in pesos as follows:
Stated at Current rates
Historical rates
P 200,000
220,000
100,000
110,000
Prepaid Insurance
50,000
55,000
Goodwill
80,000
80,000
Accounts receivable, current
Accounts receivable, long term
1. This subsidiarys functional currency is a foreign currency. What
total should RRs balance sheet include for the preceding items? ANSWER: 430,000 (current/closing rate method) 2. This subsidiarys functional currency is the peso. What total should RRs balance sheet include for the preceding items? ANSWER: 440,000 (remeasurement)
Problem 2 2. LL corporation owns a foreign subsidiary with 2600,000 LCU of PPE before accumulated depreciation on Dec. 31,20x4. Of this amount, 1700,000 LCU were acquired in 20x2 when the rate of exchange was 1.5 LCU = P1, and 900,000 LCU were acquired in 20x3 when the rate of exchange was 1.6 LCU = P1. The rate of exchange in effect on December 31, 20x4 was 1.9 LCU = P1. the weighted average of exchange rates that were in effect during 20x4 was 1.8 LCU = P1. Assuming that the PPE are depreciated using the straight line method over a 10-year period with no salvage value. How much depreciation expense relating to the foreign subsidiarys PPE should be charged in LLs Statement of Income for 20x4? ANSWER: Functional currency LCU = P144,444 Functional Currency is peso = P169,583
Problem 3 A wholly owned subsidiary of NN Inc. has certain expense accounts for the year ended December 31, 20x4 stated in local currency units as follows: LCU Depreciation of Equipment (related assets were purchase 01/01,20x2) Provision for Uncollectible Accounts Rent
120,000
80,000
Peso Equivalent value of 1 LCU January 01, 20x2
P 0.50
December 31,20x4
0.40
Average 20x4
0.44
200,000 What peso amount should be included in NN Inc.s 20x4 consolidated income statement to reflect these expenses? 1. Functional currency LCU? 2. Functional currency is peso? Answers: 1. P 176,000 2. P 183,200
Problem 4
Certain balance sheet accounts in a foreign subsidiary of SS company on
Dec. 31, 20x4 have been restated in pesos as follows: Stated at Current rates
Historical rates
P 100,000
110,000
Accounts receivable, long term
50,000
55,000
Prepaid Insurance
25,000
30,000
Patents
40,000
45,000
Accounts receivable, current
What total should be included in SS balance sheet for Dec 31, 20x4 for the above items? Functional currency LCU = ANS: 215,000 (current/closing rate method) Functional currency is pesos = ANS: 225,000 (remeasurement)
