Foreign Currency Translation

Chapter 8
Presentation Currency versus Functional Currency
 The currency in which the financial statements are
presented is called the presentation currency.
 In general, the simplest solution would be to present financial statements
in the same currency as the functional currency.
 FunctionalCurrency is the currency of the primary
economic environment in which the entity operates.
 The primary indicators of the functional currency are the currencies that
affect the sales price and costs of an organization.
 The secondary factors include the currency of the entity’s financing
activities and the currency in which receipts from operating activities are
usually accumulated.
Translation of Financial Statements of Foreign Operations
PAS 21: when an entity keeps its books and records in a currency
other than its functional currency, at the time the entity prepares its
financial statements all amounts are translated into the functional
currency, so as to produce the same amounts in the functional
currency as would have occurred has the items been recorded
initially in the functional currency.
Exchange differences (gains and losses) arising on shall be
recognized in profit or loss. Such translation procedures for
remeasurement are often known as the “temporal method”.
Translation of Financial Statements of Foreign Operations
PAS 21 specifies two approaches:
1. Current rate method – a method whereby the financial
statements are translated from the functional currency
into the presentation currency.
2. Temporal method – remeasurement from a foreign
currency other than its functional currency.
Translation of Financial Statements of Foreign Operations
 Temporal method
 The purpose of the remeasurement process is to achieve
the same result as would have been the case had the
transactions been originally recorded in the functional
currency.
Translation from functional to presentation currency (current/closing
rate method
1. Assets and liabilities, both monetary and non-
monetary are translated at current/closing rate (CR).
2. Income and expense items of the foreign operations
are translated at exchange rates at the dates of the
transactions. Average rate is usually used for items
whose transactions are numerous and occur evenly
throughout the year.
3. Translation gains or losses are taken to OCI until the
investment is disposed of.
Remeasurement of foreign currency financial statements to the functional
currency method (Temporal Method)
1. The parent and the foreign subsidiary’s operations are treated as a
single economic entity.
2. The transactions of the foreign operation are believed to be the foreign
currency transactions of the parent.
3. The economic effects of a change in exchange rates on the foreign
operation relate to individual assets and liabilities that impact the
parent’s cash flows.
4. The exchange gains and losses from remeasuring the operation’s
financial statements are taken to income statement and not the OCI.
5. The objective of remeasurement of a foreign operation’s FS is to
achieve the same results as the care where the parent, as a stand-along
entity, transacts directly in foreign currency transactions entered into
by the foreign operation.
Translation Exposure
A translation gain or loss arises when the exchange rates used in translating the
present year’s FS are diverse from those used in translating the previous year’s
FS.
1. Current rate method –translation exposure (eventually it is either a gain or
loss) is measured by the net amount of assets and liabilities in a foreign
currency balance sheet translated at the current/closing rate.
2. Temporal method – translation exposure are mainly the monetary assets and
the monetary liabilities. The net exposed position is either a net monetary
asset (Monetary assets exceeding monetary liabilities) or a net monetary
liability (monetary liabilities exceeding monetary assets).
Comparison
Comparison
Comparison
Comparison
Comparison
Problem I
Problem I US $ Functional currency is LCU-$
Combined Statement of Income & RE Translation ER Adjusted TB (Pesos)
Sales 3,624,000.00 A 40.20 145,684,800.00
Less: Cost of Goods Sold - 2,220,000.00 A 40.20 - 89,244,000.00
Gross Profit 1,404,000.00 56,440,800.00
Less: Operating Expenses
Depreciation expense 120,000.00 A 40.20 4,824,000.00
Other expense 786,000.00 A 40.20 31,597,200.00
Income tax expense 98,400.00 A 40.20 3,955,680.00
Total - 1,004,400.00 40,376,880.00
Net Income to Retained earnings 399,600.00 16,063,920.00
Retained earnings 1/1/20x4 576,000.00 H 40.00 23,040,000.00
Total 975,600.00 39,103,920.00
Less: Dividends declared 9/1/20x4 - 360,000.00 40.10 - 14,436,000.00
Retained earnings 12/31 to balance sheet 615,600.00 24,667,920.00
Problem I
Problem I US $ Functional currency is LCU-$
Balance Sheet
Asset
Cash 1,116,000.00 C 40.25 44,919,000.00
Accounts receivable (net) 729,600.00 C 40.25 29,366,400.00
Inventory (FIFO) 996,000.00 C 40.25 40,089,000.00
Land 600,000.00 C 40.25 24,150,000.00
Buildings (net) 780,000.00 C 40.25 31,395,000.00
Equipment (net) 516,000.00 C 40.25 20,769,000.00
Total Asset 4,737,600.00 190,688,400.00
Liabilities & SHE
Accounts Payable 768,000.00 C 40.25 30,912,000.00
Short-term notes payable 762,000.00 C 40.25 30,670,500.00
Bonds Payable 1,080,000.00 C 40.25 43,470,000.00
Common Stock, P10 par 1,152,000.00 H 40.00 46,080,000.00
Paid-in Capital in excess of par 360,000.00 H 40.00 14,400,000.00
Retained earnings 615,600.00 24,667,920.00
Total Liabilities & SHE 4,737,600.00 190,200,420.00
Foreign Currency Translation Reserve Gain OCI-credit 487,980.00
Total Liabilities & SHE 380,888,820.00
Problem I
Problem I US $ Functional currency is Peso
Combined Statement of Income & RE RER Adjusted TB
Sales 3,624,000.00 A 40.20 145,684,800.00
Less: Cost of Goods Sold - 2,220,000.00 Schedule - 89,224,080.00
Gross Profit 1,404,000.00 56,460,720.00
Less: Operating Expenses
Depreciation expense 120,000.00 H 40.00 4,800,000.00
Other expense 786,000.00 A 40.20 31,597,200.00
Income tax expense 98,400.00 A 40.20 3,955,680.00
Total - 1,004,400.00 40,352,880.00
Net Income to Retained earnings 399,600.00 16,107,840.00
Remeasurement loss (debit) balancing amount - 59,820.00
Retained earnings 1/1/20x4 576,000.00 date of acquisition 40.00 23,040,000.00
Total 975,600.00 39,088,020.00
Less: Dividends declared 9/1/20x4 - 360,000.00 date declared 40.10 - 14,436,000.00
Retained earnings 12/31 to balance sheet 615,600.00 24,652,020.00
 Problem I
Problem I US $ Functional currency is Peso
Balance Sheet
Asset
Cash 1,116,000.00 C 40.25 44,919,000.00
Accounts receivable (net) 729,600.00 C 40.25 29,366,400.00
Inventory (FIFO) 996,000.00 Schedule 40,059,120.00
Land 600,000.00 H 40.00 24,000,000.00
Buildings (net) 780,000.00 H 40.00 31,200,000.00
Equipment (net) 516,000.00 H 40.00 20,640,000.00
Total Asset 4,737,600.00 190,184,520.00
Liabilities & SHE
Accounts Payable 768,000.00 C 40.25 30,912,000.00
Short-term notes payable 762,000.00 C 40.25 30,670,500.00
Bonds Payable 1,080,000.00 C 40.25 43,470,000.00
Common Stock, P10 par 1,152,000.00 H 40.00 46,080,000.00
Paid-in Capital in excess of par 360,000.00 H 40.00 14,400,000.00
Retained earnings 615,600.00 balancing amount 24,652,020.00
Total Liabilities & SHE 4,737,600.00 190,184,520.00
Problem I
Statement of Comprehensive Income and Statement of Shareholders’ Equity
Functional Currency is LCU - US$
Translation into the Presentation Currency (Current/Closing Rate Method)

P Company
Statement of Comprehensive Income
For the year ended, December 31, 20x4
Net Income 16,063,920.00
Other Comprehensive income:
Foreign Currency Translation Reserve Gain OCI-credit 487,980.00
Comprehensive income 16,551,900.00
Problem I
P Company
Statement of Shareholder's Equity
For the year ended, December 31, 20x4
Common Stock PIC excess of par Retained Earnings OCI Total
Balance 1/1/20x4 46,080,000.00 14,400,000.00 23,040,000.00 0 83,520,000.00
Comprehensive income: -
Net Income 16,063,920.00 16,063,920.00
OCI 487,980.00 487,980.00
Comprehensive income: 100,071,900.00
Dividends declared - 14,436,000.00 - 14,436,000.00
Balance 12/31/20x4 46,080,000.00 14,400,000.00 24,667,920.00 487,980.00 185,707,800.00
Problem I
Schedule of translation of Cost of Goods Sold
Remeasurement
Accounts US$ exchange rate Pesos
Beginning Inventory - (RER)
H 40.00 -
Purchases 3,216,000.00 A 40.20 129,283,200.00
Goods available for sale 3,216,000.00 129,283,200.00
Less: Ending inventory - 996,000.00 A4th qtr 40.22 - 40,059,120.00
COGS 2,220,000.00 89,224,080.00
Multiple Choice
1. a. 2. b.
FC of S is Peso FC of S is LCU
Cash C 47,500.00 C 47,500.00
AR C 95,000.00 C 95,000.00
Inventory C 76,000.00 C 76,000.00
Land H 54,000.00 C 57,000.00
Equipment H 135,000.00 C 142,500.00
Total 407,500.00 418,000.00
since the inventory is carried at market value, remeasurement is done at CER.

3. a.
FC of S is LCU
AR,current C 600,000.00
AR,long-term C 300,000.00
Inventory C 180,000.00
Goodwill C 190,000.00
Total 1,270,000.00
Multiple Choice
4.
FC of S is peso
AR C 175,000.00
Inventories H 450,000.00
Prepaid insurance C 45,000.00
Land H 100,000.00
Total 770,000.00
inventory carried at cost is remeasured using HER

5.
FC-LCU FC is peso
AR, current 100,000.00 100,000.00
AR, long-term 50,000.00 50,000.00
Prepaid insurance 25,000.00 30,000.00
Patents 40,000.00 45,000.00
Total 215,000.00 - 225,000.00
Multiple Choice
6.
PPE 10years FC-LCU FC is peso
20x2 170,000.00 0.53 136,842.11 0.67 113,333.33
20x3 90,000.00 0.63 56,250.00
Total 260,000.00 136,842.11 169,583.33

7.
units FC-LCU (rate on BS date) FC is peso (date of acquisition)
Inventory,end 25000 0.50 12,500.00 0.45 11,363.64

8. b.
units FC-LCU (rate on BS date)
Inventory,end 100000 0.17 17,000.00

9.
units FC-LCU (rate the inventory were sold)
COGS 100000 0.18 18,000.00

10. d.
units FC-LCU (current rate method)FC is peso (historical)
Marketable securities 100000 0.19 19,000.00 0.19 19,000.00
Inventory 100000 0.19 19,000.00 0.16 16,000.00
Multiple Choice
70. a.
Investment 875,000.00 1.62 1,417,500.00

71. d.
PPE 4,300,000.00 0.57 2,451,000.00

72. b.
Inventory
MV 930,000.00
BV 600,000.00
Difference 330,000.00
Rate 1.03
Elimination 339,900.00 debit
Multiple Choice
73. c. Temporal method (historical for NM assets)
Jan-01 675,000,000.00 0.0086 5,805,000.00
May-01 60,000,000.00 0.0088 528,000.00
Total 6,333,000.00

74. a.
Depreciation expense
Jan-01 675,000,000.00
Accum - 135,000,000.00
Net 540,000,000.00
remaining 8.00
Depreciation expense67,500,000.00 0.0086 580,500.00
May-01 60,000,000.00
years 10.00
yearly Dep'n 6,000,000.00
May-dec 0.67
Total 4,000,000.00 0.0088 35,200.00

Total depreciation expense 615,700.00

Multiple Choice
75. b.
Accum dep'n beg 135,000,000.00
rate 0.0086
Total in peso 1,161,000.00
Add: current year 615,700.00
Total in peso 1,776,700.00

76. d.
Sales 1,529,000.00
Less: Cost of goods sold - 490,000.00
Gross Profit 1,039,000.00
Less: Operating expenses
Depreciation expense 253,000.00
Other expenses 352,000.00 605,000.00
Net income 434,000.00
Add: Remeasurement gain 52,000.00
Comprehensive income 486,000.00

78
FC-peso BV MV Difference HER life Amort
Inventory 138,000.00 198,000.00 60,000.00 0.095 5,700.00 5,700.00
Equipment 420,000.00 720,000.00 300,000.00 0.095 28,500.00 10.00 2,850.00
8,550.00
90%
Total amortization 7,695.00
Multiple Choice
79 c.
Sales 690,000.00
Less: Cost of goods sold - 351,000.00
Gross Profit 339,000.00
Less: Operating expense
Depreciation expense 103,000.00
Other expenses 125,000.00 228,000.00
Net income 111,000.00
Less: Remeasurement loss - 12,000.00
Comprehensive net income 99,000.00
%age of NCI 20%
NCI 19,800.00

80. a.
Sales 458,000.00
Less: Cost of goods sold - 175,000.00
Gross profit 283,000.00
Less: Other expenses - 52,000.00
Net income 231,000.00
Add: Remeasurement gain 15,000.00
Comprehensive NI 246,000.00
Less: Amortization - 125,800.00
Total 120,200.00
%age of NCI 20%
NCI 24,040.00
Amortization HER
Inventory 140,000.00 3months 140,000.00 0.68 95,200.00
Equipment 450,000.00 10.00 45,000.00 0.68 30,600.00
Total amortization 125,800.00