Currency translation methods for consolidating financial statements

Companies reporting under International Financial Reporting Standards (IFRS) are subject to International Accounting Standard No.

21, The Effects of Changes in Foreign Exchange Rates (IAS 21), which is substantially similar to ASC 830.

Translation can be straightforward for many entities, but it can be complex if multiple countries are involved.

When multiple currencies are involved, one key element is to determine the functional currency of the operation being consolidated. In this case, the total receipts and expenditures of cash provide no clear determination on functional currency, as the total transaction value in U. dollars and British pounds is the same while business done in euros is less.

More details on the process are available in this blog post.

It is also more helpful for management, shareholders and creditors in evaluating a company because losses and gains resulting from the exchange rate are excluded for the consolidate earnings.

Consolidated financial statements will be in the currency used by the parent company, so restatement of the other currency is required.

The key elements of currency translation will be discussed through a hypothetical case study.

Remeasurement and Translation The entire task of foreign currency translation can be understood as determining the correct exchange rate to be used in converting each financial statement line item from the foreign currency to USD.

The translation adjustment is an inherent result of this process, in which balance sheet and income statement items are translated at different rates.

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