Foreign Currency Translation

Rules for translating functional currency FS into the selected presentation currency FS.
a.
b.

c.
d.

Assets and liabilities are translated at the exchange rate existing at the balance sheet
date.
Stockholders equity items are translated using historical rates (i.e. the exchange
rates at the original transaction dates) except retained earnings which is translated by
components. Retained earnings may be translated by applying a single rate at the
date of acquisition only, using the spot exchange rate at that date.
Revenues and expenses rates at the date of the transaction. For practical purposes, a
weighted average for the current period is used instead.
This translation process is referred to as Current rate method and any exchange
difference resulting from its application is called translation adjustment shown as a
component of stockholders equity.

Net Income to Retained Earnings

333,000

Retained Earnings 1/1

480,000

Total

813,000

Less: Dividends declared 9/1/2014

300,000

Retained Earnings 12/31

513,000

13,386,600
40.00

19,200,000
32,586,600

40.10

12,030,000
20,556,600

Balance sheet
Cash

930,000

40.25

37,432,500

Accounts Receivable

608,000

40.25

24,472,000

Inventory

830,000

40.25

33,407,500

Land

500,000

40.25

20,125,000

Building

650,000

40.25

26,162,500

Equipment

430,000

40.25

Total

3,948,000

17,307,500
158,907,000

Practice Problems
Liabilities and Equity

Assume that on January 2, 2014, P Company, a Philippine based company acquired for
US$2,000,000,000 on 80% interest in S Company and maintains its books in U.S. dollars and
they are in conformity with GAAP in the Philippines. S Companys financial statements are
prepared in the local currency unit.
Exchange rates for the US dollars for 2014 are as follows:
Date

Spot rate

January 2, 2014 (date of acquisition)

40.00

September 1, 2014

40.10

December 31, 2014

40.25

Average for the year

40.20

In translating the income statement accounts, it is assumed that revenues were generated and
expenses were incurred evenly during the year.
Translation into the presentation currency (Current/Closing rate method)
Income statement and R/E

Trial Balance

Exchange rate

Translated TB

Sales

3,020,000

40.20

121,404,000

COGS

1,850,000

40.20

74,370,000

Depreciation expense

100,000

40.20

4,020,000

Other expenses

655,000

40.20

26,331,000

Income tax expense

82,000

40.20

3,296,400

Accounts payable

640,000

40.25

25,760,000

Short-term payable

635,000

40.25

25,558,750

Bonds payable

900,000

40.25

36,225,000

Common stock, 10 par

960,000

40.00

38,400,000

Paid in capital in excess of par

300,000

40.00

12,000,000

Retained earnings from above

Foreign
currency
translation
adjustment

513,000

Total Liabilities and Equity

3,948,000

20,556,600
B/A

406,650
158,907,000

Verification of translation adjustment

Jan. 2 Exposed net asset position

Adjustments for changes in net asset position
during the year
Net Income
Dividends declared
Net asset position translated using rate in each
transaction
Dec. 31 Exposed net asset position
Change in cumulative transaction adjustment
during the year
Jan. 2 Cumulative translation adjustment
Dec. 31 cumulative translation adjustment

US $
1,740,000

Exchange
rate
40.00

Reporting currency
(Peso)
69,600,000

333,000
(300,000)

40.20
40.10

13,386,600
(12,030,000)

1,773,000

40.25

70,956,600
71,363,250
406,650
406,650