Financial Education

When companies using different currencies transact business, at least one of the companies will have to translate a foreign currency into its home currency. For sales made in cash, this can be done at the time of sale.

When the sale is made on credit, the company will have to record an account receivable or account payable until the account is settled. During the interim, the relative values of the currencies could change. The accounting treatment for such changes is governed by International Accounting Standard (IAS) 21 and U.S. Financial Accounting Standard (FAS) 52. The treatment is the same under either method.

• At the time of sale, the sale is recorded at the current exchange rate and an equivalent value asset or liability is created.
• If balance sheets are prepared prior to collection, the asset or liability must be restated to the then-current exchange rate value. The change is recognized as an unrealized exchange rate gain/loss on the income statement.
• When the account is collected, the asset or liability is removed and any previously unrecognized gain/loss is recognized on the income statement.

Since the asset and liability are always presented at fair value and changes flow through the income statement, there is seldom need to adjust the financial statements to examine the effect.

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis, Ratio Analysis

See also:

Translating the Financial Statements of a Foreign Subsidiary in a Hyperinflationary Economy

Translation Gains and Losses

Clean Surplus Accounting

Translating A Foreign Subsidiary’s Results into the Parent Company’s Currency

Translating a Foreign Subsidiary Income Statement Using the All-Current Method