A Guide to Learning Independently

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Accounting 401
Advanced Accounting
Foreign Currency Translation

A. Background
1. In the past there were four approaches that could be used to convert foreign financial statement information to the reporting currency, U.S. dollars. Those methods were: Current-Non-current Method, Monetary-Non-monetary Method, Temporal Method, and the Current Rate Method. 2. Under the current-non-current method, current assets and current liabilities were translated using the current exchange rate, while non-current assets and liabilities were translated using historical exchange rate(s). Later, amendments changed certain assets and liabilities to the current rate. Income statement items, for the most part, were translated using the average exchange rate for the period. The translation gain or loss was included on the current income statement. 3. Under the monetary-non-monetary method, monetary assets and liabilities were translated with current exchange rates, while non-monetary assets and liabilities were translated with historical rate(s). The income statement items and the translation gain or loss were handled similarly to the current-non-current method. 4. The other two approaches will be discussed later in these notes.

B. Translation Gains and Losses
1. Since foreign exchange rates vary, translation gains or losses will arise and be included in the translated financial statements. 2. Both current and historical exchange rates are used to convert the accounts. a. The current exchange rate is the spot exchange rate on the balance sheet date. b. Historical exchange rate(s) represent past spot rate(s) that existed when the transaction(s) occurred c. A company’s exposure to translation gains or losses comes from those accounts converted using current exchange rates. Those accounts converted using historical rate(s) are fixed in dollar...
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