📖 Overview
This standard addresses accounting treatment for foreign currency transactions and translation of financial statements of foreign operations. Monetary items are revalued at the balance sheet date exchange rate.
🎯 Scope
This standard applies to the accounting treatment for foreign currency transactions and translation of foreign operations.
⚙️ Key Principles
1. **Functional Currency**:
- The currency of the primary economic environment in which the entity operates.
- Determined based on primary and secondary indicators.
2. **Reporting Currency**:
- The currency in which financial statements are presented.
- Can be different from the functional currency.
3. **Foreign Currency Transactions**:
- Initial recording at exchange rate on transaction date.
- Monetary items are remeasured at the closing rate on the balance sheet date.
- Non-monetary items remain at transaction date rate.
4. **Translation of Foreign Operations**:
- Assets and liabilities are translated at the closing rate.
- Revenues and expenses are translated at transaction date rate or period average.
- Translation differences appear in OCI.
📏 Measurement
**Foreign Currency Transactions:**
- Initial recording: Exchange rate on transaction date.
- Monetary items at balance sheet date: Closing Rate.
- Non-monetary items at historical cost: Exchange rate on transaction date.
- Non-monetary items at fair value: Exchange rate on fair value determination date.
**Translation of Foreign Operations:**
- Assets and liabilities: Closing Rate.
- Revenues and expenses: Transaction date rate or period average.
- Equity: Historical transaction date rate.
**Functional Currency Indicators:**
- **Primary**: Currency that primarily influences sales prices, labor costs, materials.
- **Secondary**: Currency in which activities are financed, cash is held.
✅ Recognition
**Exchange Differences on Foreign Currency Transactions:**
- Recognized in the income statement in the period they arise.
**Translation Differences for Foreign Operations:**
- Recognized in OCI.
- Accumulate in a separate equity component.
- Upon disposal of the foreign operation, accumulated differences are reclassified to the income statement.
**Change in Functional Currency:**
- Applied prospectively from the date of change.
📊 Presentation
**On the Balance Sheet:**
- Accumulated translation differences appear as a separate equity component.
**On the Income Statement:**
- Exchange gains and losses (from monetary items) appear within other income or expenses.
**On OCI:**
- Translation differences for foreign operations.
**Note Disclosures:**
- Functional currency and reporting currency.
- Reasons for functional currency choice if different from country's currency.
- Amount of exchange differences recognized in the income statement.
- Amount of exchange differences recognized in OCI.
- Reasons for any change in functional currency.
- Exchange rates used.
📝 Disclosure Requirements
Disclosures required:
- Functional currency and reporting currency.
- Reasons for functional currency choice if different from country's currency.
- Amount of exchange gains or losses recognized in the income statement.
- Amount of exchange differences recognized in OCI.
- Reasons for any change in functional currency (if any).
- Exchange rates used for translation (closing rate, period average).
- For significant foreign operations:
- Name and nature of the operation.
- Functional currency of the operation.
- Significant assets and liabilities.
- Any restrictions on transferring funds from foreign operations.
- Effect of material changes in exchange rates.
🔗 Related Standards
ASC 815 (Derivatives and Hedging), ASC 830-20 (Translation of Foreign Operations), ASC 830-30 (Exchange Differences)