Foreign Currency Translation

Functional currency

Currency of the primary economic environment — look at cash flows, sales prices and markets, expenses, financing, intercompany volume.

Transactions

• Record at spot on transaction date.
• Remeasure monetary items at each balance sheet date → gain or loss in net income.

Foreign statements

	Translation (current rate)	Remeasurement (temporal)
When	Functional currency = foreign	Functional currency = US dollar (or highly inflationary)
Assets and liabilities	All at current rate	Monetary current; nonmonetary historical
Income statement	Weighted average	Average; cost of goods sold and depreciation historical
Difference	Other comprehensive income (OCI) — cumulative translation adjustment (CTA)	Net income

Other

• Highly inflationary: > ≈ 100% cumulative over 3 years → remeasure.
• Sale of foreign entity → recycle CTA to income.

Exam traps

• Books kept in a currency that isn't the functional currency: first remeasure into the functional currency, then translate into the reporting currency.
• Equity accounts are translated at historical rates; retained earnings is carried forward, not retranslated.
• A payable in a foreign currency gives a gain when that currency weakens — fewer dollars are needed to settle it.