Question

When are foreign currency transaction gains or losses required to be recognized in the financial statements, how are they to be disclosed and where in the financial statements?

Answer 1

Answer)

When an entity maintaining books using US$ engages in a transaction in a foreign currency, remeasure the transaction using the spot rate ( for currency exchange) as at the transaction date.

• Also, if the entity has any monetary assets/liabilities (e.g., cash, A/R, A/P) valued in foreign currency, these need to be adjusted for changes in the spot rate and the foreign exchange gain/losses are reported as Non-operating gains losses on income statement.

2 different types of Foreign Currency TRANSACTIONS:

• Operating Transactions - Buying, selling, lending or investing in a foreign country.

E.g., If goods/services are procured from a foreign supplier and the payable will be setteled ( denominated) in a foreign currency, need to calculate the foreign exchange gain/loss based on the spot rate (reported on Income statement)

  

• Forward exchange contracts - Agreement to exchange 2 different currencies at a future date, at a specific rate.

Promise (i.e, right and obligation) to exchange a specified quantity of US$ for a specified quantity of the foreign currency at a future date. Results in foreign exchange gains/loss due to exchange rate fluctuations between the contract date and the contract settelment date.

Steps for Transalation

• (I/S)Income statement:

# Translate (I/S)income statement items using the Weighted-average exchange

=> May transalte individual gains/losses using historical exchange rate on the transaction date, if readily available

# Carry Net income to statement of (R/E)retained earning to calculate Ending (R/E)reatined earning which is rolled over (B/S)balance sheet.

• (B/S)Balance Sheet:

# Transale Contributed capital (C/S and APIC) using Historical exchange rate in effect at the times the securities were issued and repurchased

=> Retained earning(R/E) is derived from the statement of retained earnings, which includes the net income from (I/S)income statement and dividends removed at the exchange rates on declaration dates

# Translate assets and liabilities using the Year and exchange rate

# Retained earnings was rolled forward from above net income

# Plug the Translation Gains/Loss which is included as a part of A.OCI (Accumulated other comprehensive income) on the balance sheet.

=> Since various exchange rates are used, (B/S)balance sheet generally doesnot normally balance when all of the accounts are translated from the foreign currency to US$. The plug is the translation adjustment which is reported seprately in the stockholder's equity section as part of accumulated OCI