FOREIGN CURRENCY TRANSLATION
1. Difference between the translation and conversion of foreign currency
Foreign currency translation The process is repeated presentation of financial information from one currency to another currency. While foreign currency conversion between the exchange of one currency to another currency physically.
The difference is, the translation is simply a change of monetary units, for example, on a balance sheet that is expressed in British pounds are presented back to the U.S. dollar equivalent value. There is no physical exchange that occurred, and no relevant transaction occurs. While the conversion, allowing the physical exchanges that occur and there is a related transaction occurring.
2. In terms of foreign currency translation
1. Conversion, an exchange of one currency into another currency.
2. Exchange rate now, the exchange rate prevailing on the date of the relevant financial laporang.
3. Net asset position at risk, the excess assets are measured or denominated in foreign currency and in translasikan at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.
4. Exchange forward contracts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.
5. Functional currency, is the main currency used by a company in the conduct of business activities. Usually such currency is the currency of the State where the company is located.
6. Historical exchange rate, the exchange value of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.
7. Reporting currency, the currency used in preparing the company financial statements.
8. Spot exchange rate, the exchange rate for currency exchange in the time immediately.
9. Translation adjustments, the adjustments arising from the translation of financial statements of a company’s functional currency into the reporting currency.
Glossary of foreign currency translation, adapted from GAAP (SFAS) No.52, 1981.
1. Attributes, quantitative characteristics of an item being measured for accounting purposes. Example, historical cost and replacement cost which is an attribute of an asset.
2. Conversion, exchange a currency into another currency.
3. Present exchange rate, exchange rate prevailing on the date of the relevant financial statements.
4. Discount, while the subsequent exchange rate lower than current levels.
5. Net asset position at risk, as measured in excess of assets or denominated in foreign currencies and translated at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.
6. Foreign currency, a currency other than the currency used by a State, a currency other than the reporting currency used by the company.
7. Financial statements in foreign currencies, the financial statements using foreign currency as the unit of measurement.
8. Foreign currency transactions, the transaction (ie sale or purchase of goods or services, or debt loans or accounts receivable) under the conditions stated in currencies other than the functional currency of the company.
9. Foreign currency translation, the process to declare the amounts denominated or measured in one currency into another currency using the exchange rate between two currencies.
10. Foreign operation, an operation that produces financial statements that (1) combined or consolidated or accounted for under the equity method in reporting the company’s financial statements and (2) arranged in foreign currencies other than the reporting currency of the reporting enterprise.
11. Forward exchange contacts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.
12. Functional currency, the currency used by suatau yanga major companies in the course of business, and in generating or using cash.
13. Historical exchange rate, exchange rate of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.
14. Local currency, the currency of a State that is used; the reporting currency used by a domestic or foreign operations.
15. Items of monetary policy, the obligation to pay or the right to receive a unit of currency in a fixed value in the future.
16. Reporting currency, the currency used in preparing the company financial statements.
17. Completion date, the date when the debt is paid by an uncollectible receivables.
18. Spot exchange rate, exchange rate for currency exchange in the time immediately.
19. Date of the transaction, the date when a transaction is recorded in the accounting records of the reporting company.
20. Translation adjustments, adjustments arising from the translation of financial statements of a company’s functional currency into the reporting currency.
21. Unit of measurement, the currency used to measure the assets, liabilities, revenues and expenses.
3. Differences in gains and losses of foreign currency translation
If the point of view of local currency to be used (local companies viewpoint), the entry of the translation adjustment in current earnings do not need to be done. Enter translation gains and losses in earnings will distort the real financial relationships and can mislead the users of such information. Translation gains or losses should be treated from the standpoint of local currency as an adjustment to equity owners.
If the parent company’s reporting currency is the unit of measurement of the financial statements are translated (the parent company’s point of view), it is advisable to recognize gain or loss on translation of profit as soon as possible. Point of view of the parent company saw overseas subsidiaries as an extension of its parent company. Translation gains and losses reflect the increase or decrease in equity of foreign investment in domestic currency and should be recognized.
4. Advantages and disadvantages of foreign currency translation
Changes in the value of domestic currency equivalent of the net assets of foreign subsidiaries are not realized and no effect on the local currency cash flows generated from foreign entities. Translation adjustment should be accumulated separately as part of consolidated equity.
- Suspension and Amortization
Suspension of translation gains or losses and to amortize it over the useful adjustment items related to the balance sheet, primarily related to debt state of suspended will be amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized during the remainder of the loan as an adjustment to interest expense.
- Partial Suspension
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
- Not suspended
Recognize translation gains and losses in the income statement as soon as possible. However, inserting translation gains and losses in the current year’s profit will introduce a random element in the profits that may result in significant fluctuations in earnings in case of exchange rate changes.
Translation gains and losses reflect the increase or decrease in equity investments in domestic currency and should be recognized.
- Effect of foreign currency translation method to the Financial Statements
Although most of the technical issues in accounting tends to resolve itself over time, foreign currency translation terrnyata is an exception. That this trend will continue to be supported by such developments as the collapse of the dominance of the dollar, the currency rate movements are approved by the government, and the globalization of world capital markets, which have increased the importance of reporting and financial disclosure. Such developments have profoundly increased interest ¬ executive-financial executives, accountants, and financial community on the importance and economic consequences of foreign currency translation. Let us look at the nature and development of international accounting puzzle this puzzle.
Single Rate Method
Based on this translational approach, the financial statements of foreign operations, which are considered by the parent company as an autonomous entity, has the reporting of their own domicile. This is a local accounting environment where foreign affiliates are to transact his business affairs. To maintain the “flavor” of the local currency reports, a way must be found so that translation can be implemented with minimal distortion. The best way is the use of the method of exchange rate policies.
Since all financial reports of foreign exchange is actually multiplied by a konstansta, this translation method to maintain its financial results and the original relation (eg financial ratios) in the consolidated statements of individual entities that are consolidated. Only the form of overseas estimates, not the essence, the change in the method of exchange rate policies.
Although interesting and conceptually simple, the method of exchange rate policies were blamed by some people because it undermines the basic purpose of the consolidated financial statements, that is because it presents, for the benefit of shareholders of the parent company, operating results and financial position of the parent company and firms from the perspective of children the single currency. maintain the parent company’s reporting currency as the unit of measurement. In the prevailing exchange rate method, the results will reflect the consolidation of perspekfif-exchange perspective of each country where companies are children. For example, if an asset dip = roleh an overseas subsidiary company for when the rate was 1.000 VA VA 1 = $ 1, then from the perspective of historical cost dollars is $ 1,000; from the perspective of local currency is also $ 1000. If the exchange rate changed to VA 5 = $ 1, the historical cost of those assets from the perspective of the dollar (translas’ historical cost) remains $ 1,000. If the local currency will be retained as the unit of measurement, will be expressed nifai assets of $ 200 (exchange rate translation effect). Rate method applies also to blame because it assumes that all assets are influenced by local-currency exchange rate risk (ie, assuming that the fluctuations in the domestic currency equivalent, which is caused by fluctuations translational running, an indicator of changes in the intrinsic value of those assets). Hat is rarely true because the value of inventory and fixed assets in foreign countries are generally supported by local inflation. Multiple Rate Methods
Methods of combining multiple exchange rate exchange rate historically runs and in the process of translation. 3 Such methods are discussed below.
Force-historical method. Based on the true-historical approach, which is popular in the U.S. and other places before the year 1976, current assets and current liabilities of a subsidiary abroad are translated into the reporting currency using the exchange rate of its parent company applies. Assets and liabilities are non-smooth translated with historical rates.
Items of income statement, except for depreciation and amortization, are translated at the exchange rate on average each month of operation or on the basis of the weighted average of the entire period to be reported. Depreciation and amortization are translated using historical exchange rates prevailing at the time of the relevant asset is obtained.
This methodology is, unfortunately, has some drawbacks. For example, this method is less choose a conceptual justification. Existing definitions of assets and liabilities and non-current classification does not explain why such a manner which will determine the exchange rate used in the process transiasi.
Monetary-nonmonetary method. As with any true-historical method, the method moniter using pattern-classification of non-monetary balance sheet to determine the appropriate exchange rate translation.
Due to monetary items in cash settled; usage rate applicable to translate the items of foreign exchange domestic currency equivalent yield that reflects the realizable value or value of the solution.
Temporal method according to the temporal approach, translational currency conversion is a process of measurement (ie, repeated presentation of a particular value). Therefore, this method can not be used to change the attributes of an item that is being measured; this method can only change the unit of measurement. Balance of foreign currency translation, for example, just change the (restate) the denomination of inventory. not the actual assessment. In U.S. GAAP, assets are measured based on jumiah cash on hand at the balance sheet date. Receivables and payables expressed in a number expected to be received or paid at maturity. Liabilities and other assets are measured at the prevailing price when the item is acquired or item ¬ occurs (historical price). Even so, some of which are measured by the prices prevailing at the date of financial statements (the price goes), such as inventory under the rules of cost or market. In short, there is a dimension of time associated with the values of this money.
By Lorensen, the best way to maintain accounting bases are used to measure these items is to translate the foreign currency amount of foreign currency at the exchange rate prevailing on the date of the measurement of foreign currency takes place. Temporal principle thus stated that cash, receivables, and payables are measured at the promised amount should be translated using the exchange rates prevailing at balance sheet date. Assets and liabilities are measured at the price of money should be translated using the exchange rates prevailing on the date with respect to the price of money.
Translation methods can be classified into two types of methods that use a single exchange rate for the present re-translation of foreign currency balances to the equivalent value in domestic currency or a method that uses a variety of rates.
- Methods Single Currency
This method has long been popular in Europe, applying the exchange rate, the current exchange rate and the closing exchange rate, for all assets and liabilities lancer. Revenues and expenses denominated in foreign currencies are generally translated using the exchange rate prevailing at the time the posts are recognized. However, to facilitate these items are generally translated using the weighted average exchange rates are appropriate for the period. The financial statements of a foreign operation has its own reporting domicile, local currency environment in which the foreign affiliate companies do business. An asset or liability denominated in foreign currency is said to face foreign exchange risk if the equivalent in the currency used to translate the asset or liability.
- Multiple methods of exchange rate
The method combines Multiple Currency exchange rate exchange rate historically and now in the process of translation.
- Now the method-Nonkini
Based on the Method of Non-Now-Now, lancer current assets and liabilities of foreign subsidiaries are translated into the reporting currency of its parent company based on the exchange now. Assets and liabilities are translated lancer historical rates of exchange. Items of income statement (except for depreciation and amortization) are translated based on the average rate prevailing in each month of operation, or based on a weighted average over the entire reporting period. Depreciation and amortization are translated based on the historical exchange rate recorded saaat assets acquired.
However, this method does not consider the economic element. Using year-end exchange rate to translate the lancer assets implies that cash, receivables, and inventory in foreign currencies are equally at risk of exchange rate.
- Monetary-nonmonetary method
Non-monetary method Monetary also use the balance sheet classification scheme fatherly determine the appropriate exchange rate translation. Monetary assets and liabilities are translated based on the exchange rate now. Items of non-monetary assets, long-term investment, and stock investors are translated using historical exchange rates. Items of income statements are translated using a procedure similar to that described for the concept of non-present now.
- Temporal method
By using the temporal method, tranlasi currency conversion is a process of re-measurement or presentation of a certain value. This method does not change the attributes of an item being measured, but only change the unit of measurement. Translation of these balances in foreign currency-denominated causes repeated measurements such items but not the actual assessment. Under U.S. GAAP, measured by the amount of cash on hand at the balance sheet date. Receivables and liabilities are stated at amounts expected to be received or paid at maturity
6. Evaluation and selection of foreign currency translation method
Under the temporal method, monetary items such as cash, receivables, and liabilities are translated based on the exchange now. Such items are translated at the exchange rate of monetary base that maintains in the first measurement. In particular, the value of assets in foreign currencies are reported at historical cost, are translated based on the historical exchange rate. Why is that? This is because historical cost in foreign currencies are translated at the exchange rate exchange rate historically produces historical cost in domestic currency. These four methods discussed at one time been used in the United States and can be found even today in many countries. In general, these methods lead to the translation of foreign currency which is quite different. The first three methods (method of exchange rate now, the method now-non-date, and method-monetary non-monetary) are used in the identification of assets and liabilities which are at risk or may be protected from foreign exchange risk. Then, the translation method applied consistently by taking into account these differences.
WHICH IS BEST?
EXCHANGE RIGHT NOW
So far this term the exchange rate used in translation method refers to the historical or present exchange rate. The average rate is often used in the income statement for the posts load. Some countries use the exchange rate is different for different transactions. In this situation should be selected some existing exchange rate. Some suggested alternatives are:
1. rate of dividend payment
2. free market rate, and
3. penalty rates or preferences that can be used, such as those involved in import export activities.
- 7. Foreign currency translation relationship with inflation
The use of the exchange rate is now to translate the cost of non-monetary assets are located in berinflasi environment will ultimately lead to an equivalent value in domestic currency is much lower than the initial baseline measurement. At the same time, earnings will be much larger translated with respect to load depresisasi which is also lower. The translation as it can be more easily mislead readers as to give information to the reader. Assessment of the lower dollar typically lower earnings power akutal of foreign assets which are supported by local inflation and the ratio of return on investment that affected inflation in a foreign operation may create false expectations on future profits. FASB rejected before the inflation adjustment process of translation, because the adjustment is not inconsistent with the historical cost basis of the assessment framework used in the basic financial statements in the U.S.. As a solution FAS No. 52 requires the use of the U.S. dollar as the functional currency for those residing overseas operations with hyperinflation environment. This procedure will maintain a constant value of the dollar equivalent of foreign currency assets, because these assets will be translated according to the historical rate. The imposition of losses on fixed assets in the translation of foreign currency to equity shareholders will cause a significant effect on financial ratios. Foreign currency translation problem can not be separated from the problem of accounting for foreign inflation.