Reasons For Doing Translation

Companies with significant overseas operations prepare consolidated financial statements that enable the reader to gain a holistic understanding of the operating companies, both domestic and abroad. To achieve this, the financial statements of foreign companies are denominated in foreign currencies are re-presented by the parent company’s reporting currency. The process of re-presentation of financial information from one currency to another currency is called translation. Issues related to currency translation, namely:
1. The fact that the relative value of foreign currencies is rarely defined.

2. The exchange rate variable, which combined with a variety of translation methods that can be used and the difference in treatment based on the advantages and disadvantages of translation, making comparisons of financial results of one company with another company, or a comparison of the results of the same company from one another difficult period. This situation is a challenge for multinational companies to provide disclosure of operating results and financial position.

3. To record foreign currency transactions, measure risk of a firm to influence the currency and communicate with interested parties from abroad.

4. For accounting purposes, the assets and liabilities of foreign currency exchange risk is said to face if a change in the currency exchange rate causes the currency to the parent company (reporting) are also changed.

Finally, expanding the scale of international investment that increases the need to communicate accounting information about a company that is domiciled in a country to users in other countries. This need arises when a company intends to list its shares on an overseas stock exchange intends to make acquisitions or joint ventures with foreign parties, or to communicate the results of operations and financial position to its foreign shareholders.

Background and Terminology

Translation is not the same as the conversion, which is the exchange of one currency to another currency physically. Only translational changes moneterr units, as well as a balance sheet presented are expressed in British pounds back into the U.S. dollar equivalent value. There is no physical exchange that occurred, and no related transactions that have occurred as it carried out the conversion. Balances in foreign currencies are translated into domestic currency equivalent value based on the foreign exchange rate is the price of one unit of a currency expressed in another currency. Foreign currency transactions occur on the spot market, forward or swap. Currency bought or sold on the spot generally must be sent as soon as possible ie within 2 working days. Translation of these balances in foreign currencies made simple, either directly or indirectly. Domestic currency equivalent value obtained by multiplying the balance in foreign currency exchange rate quotations directly by dividing the balance of foreign currency with an indirect quotation. Transaction on forward markets is an agreement to exchange one currency for a certain amount into another currency at a future date. Quotations on forward markets is expressed by the discount or premium of the spot rate. Swap transaction involves the purchase of spot and forward sales or sales on the spot and forward purchase a currency at the same time. Investors often make use of swap transactions to take advantage of interest rates higher in a foreign country while in the same opportunity to protect themselves from unfavorable movements of the exchange rate of foreign exchange.


If a relatively stable exchange rate, currency translation will not be more difficult than the process of translation inches or feet into the equivalent in metric units. However, the exchange rate is rarely stable. Currency advanced industrial countries are free to find its value in the currency market. Fluctuating exchange rates is particularly so in Eastern Europe, Latin America, and parts of Asia. Fluctuations in currency exchange rates increased the amount of translation that can be used in the translation process and lead to gains and losses of foreign currency. Currency movements are also very closely linked to local inflation rate.

Effect of Alternative Currency Translation Of Financial Statements

The third follows the exchange rate can be used when performing the translation of foreign currency balances into local currency, namely:

a. Present exchange rate (current), is the exchange rate at the date of the financial statements.

b. Historical rates (historical), is the exchange rate at the time an asset is denominated in foreign currency was first acquired, or when a foreign currency liabilities in the first place. Generally maintain the initial cost is equivalent to an item in a foreign currency denominated in domestic currency reports. The use of the exchange rate to protect the historical financial statements of profits and losses of foreign currency translation, of the increase or decrease in the dollar equivalent of foreign currency balances arising from exchange rate fluctuations translasiantar reporting period. The use of the exchange rate now lead to a gain or loss on translation.
c. Average rate (avarage), is the simple average or weighted exchange rate of the exchange rate is now or historically.
Foreign currency transactions occur at the time a company buys or sells goods, with payment made in foreign currencies or when companies borrow or lend foreign currency. Translation is required to maintain accounting records in the currency of the reporting company. Of the two types of adjustment transactions, the first gains and losses on transactions settled, arise when the exchange rates used to record transactions on the exchange rate initially different from that used at penyelasian. The second type of adjustment is a transaction gains and losses from transactions that occur when the unresolved financial statements prepared before a transaction is completed.
Fluctuating exchange rates are causing some major issues in accounting for foreign currency translation:

1. Which exchange rate should be used to translate foreign currency balances in domestic currency?

2. Assets and liabilities denominated in foreign currencies which are at risk of exchange rate changes?

3. How should the translation gains and losses should be recorded?

Foreign Currency Transactions

The main characteristic of a particular foreign currency transactions are influenced settlement in a foreign currency. Foreign currency transactions occur at the time a company buys or sells goods with payments made in a foreign currency. FAS No. 25 is a statement of accounting standards for foreign currency that contains:

a. On the date a transaction is recognized, any assets, liabilities, revenues, expenses, gains or losses arising from a transaction must be measured and recorded in the functional currency of the company that performs recording by using the exchange rate prevailing on that date yag.

b. At each balance sheet date, recorded balances are denominated in a currency other than the functional currency of the company that performs record keeping should be adjusted to reflect the current exchange rate. On this basis, adjustments to foreign exchange rate (ie gains or losses on transactions that have taken place) should be made in the event of changes in the exchange rate between the transaction date and settlement date. If the financial statement prepared before the completion of the transaction, adjustments to accounting (ie gains or losses from transactions that have not been completed) will be equal to the difference between the amount initially recorded and the number presented in the financial statements. FASB rejected the view that a distinction be made between gains and losses from transactions that have been resolved and unresolved, because such a distinction can not be applied in practice. There are two accounting treatment of gains and losses that can be applied to transactions.

Single Transaction Perspective

Based on single tramnsaksi perspective, exchange rate adjustments niali (either already completed or not) are treated as adjustments to the accounts of the initial transaction based on the premise that a transaction and its completion is a single event.
Perspective Two Transactions

Based on the perspective of two transactions, collection of accounts receivable in the krona is considered as a separate event from the sales that contributed to the accounts.

Foreign Currency Translation

Internationally operating companies use the various methods to declare assets, liabilities, revenues and expenses denominated in foreign currency into domestic currency. This translation method can be classified, namely:
1. Methods Single Currency

Single rate method, which has long been popular in Europe, applying the exchange rate or the current exchange rate of closure, for all assets and liabilities. Revenues and expenses denominated in sing 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. Under this method, the financial statements of a foreign operation (which is seen by the parent company as an autonomous company) has its own reporting domicile, local currency environment in which the foreign affiliate companies do business.
2. Monetary methods – non-monetary

Using the balance sheet classification scheme for determining the appropriate exchange rate translation. Monetary assets and liabilities are translated based on the exchange rate now. Items of non-monetary (fixed assets, long-term investment and inventory) are translated using historical rates. Items of income statements are translated using a procedure similar to that described for the concept of present-nonkini. However, it should be noted that, the monetary-nonmonetary method depends on the balance sheet classification scheme for determining the appropriate exchange rate translation. This can produce inaccurate results.
3. temporal method

By using the temporal method of currency translation is the process of converting the measurement or presentation of a particular value of money. This method does not change the attributes of an item being measured, but only change the unit of measurement.

Right now the exchange rate

The exchange rate used in translation method refers to the historical and 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, have chosen some of the existing exchange rate. Some suggested alternatives are: (1) rate payment of dividends, (2) free market rate, and (3) penalty rates or preferences that can be used, such as those related to imports or exports.

Advantages and Disadvantages of Translation

  1. suspension

Issuance of translational adjustment of the current period earnings generally recommended because this adjustment is the result of the preparatory process repeated. Changes in the value of the 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. Therefore, it would be likely to mislead if they included such adjustments in current earnings. Under these circumstances, translation adjustments should be accumulated separately as part of consolidated equity.

  1. Deferral and amortization

Some parties supported the suspension of translation gains or losses and to amortize these adjustments during the useful life of related balance sheet items.

  1. Partial Suspension

The third option in accounting ntuk translation gain or loss is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized. Although there was a conservative, translation gains deferral solely due to an advantage, it ignores the changes in exchange rates.

  1. not Suspended

The final option is to recognize translation gains or losses in the income statement as soon as possible, this option is looking at the suspension of any kind tend to be false and misleading.

Development of the Accounting Translation

Before 1965

Translational practices most U.S. companies are guided by the Accounting Research Bulletin (ARB No. 4) later reissued as chapter in ARB No. 12. 43. This statement encourages the use of method-nonkini now. Transaction gains or losses directly included in the profits. Net gains or losses written off each other during the period. Net translation losses recognized in net income, while net deferred translation gains in balance and delays account is used to eliminate the loss of translation in the future.

Chapter ARB No. 12. 43 allow the exclusion of certain over-nonkini present method. In certain circumstances, the inventory can be translated based on historical rates. Long-term debt arising Since the purchase of long-term assets can be translated berdsarkan rates now in case of changes in the exchange rate (and considered to be fixed). Each accounting berbedaan caused by repeated presentation of utng treated as part of the cost of assets. Menstralasikan all debts and receivable in foreign currency rates of exchange now allowed Accounting Principles Board Opinion after No. 6 issued in 1965. No changes to the ARB. 43 now gives another translation option for the company.

To end keaneragaman treatment allowed by the standards of previous translations, the FASB issued FAS 8 are controversial in 1975. Suspension of translation gains and losses are not allowed anymore. Translation gains and losses and foreign currency transactions should be recognized in earnings during the period of exchange rate changes. 8 companies of the FAS reaction varied. Some parties supported the basic theory used, while many others were condemned because of distortions that may result in reported earnings. FAS # 8 has been criticized for causing the accounting results that are inconsistent with economic reality. Effect of FAS 8 yo-yo to return the company also raised concern among executives of multinational companies. They worry that the company reported earnings will be more volatile when compared with domestic corporate profits and thus would push the company’s stock price.

1981-until now

In May 1978, FASB invites public comment on 12 the first statement is issued, of which many are responding to public discontent about FAS No. 8 so that the FASB to reconsider FAS No. 8 and after much ertemuan and two draft interim, issued Statement Of Financial Accounting Standards No. 52 in 1981.

Contents Standards No.52

Purposes according to FAS 52 translation differs substantially from the objectives according to FAS # 8. FAS # 8 in light of the parent company financial statements by requiring foreign currency are presented as if the entire transaction occurs in U.S. currency Dola. No standard. 52 recognizes that both the point of view and the parent company is a subsidiary of the basic framework of legitimate reporting, by the rules translasinya kerana designed to:

a. Reflect, in the consolidated financial statements, results and financial relationships as measured in the currency of the primary (main) used by each of the consolidated entity conducts its business activities (its functional currency, functional currency)
b. Provide general information in accordance with the expectations of the economic impact of exchange rate changes on cash flow and equity of a company.

If the Local Currency translation Currency is Functional

If the functional currency is the foreign currency used in the records of the entity, its financial statements are translated into dollars using the foreign exchange translation gains or losses are now arising disclosed as a separate component in stockholders’ equity. This is to maintain a ratio calculated from the financial statements if the financial statements in the local currency. Exchange procedure is now being used are:

a. All assets and liabilities denominated in foreign currencies are translated into dollars using the exchange rate as at the balance sheet, capital accounts are translated based on historical rates.

b. Revenues and expenses are translated using the exchange rate on the date of the transaction, although the weighted average exchange rate can be used for practicality.

c. Translation gains and losses are reported sebgai separate components in the consolidated shareholders’ equity. This rate adjustment will not go into the income statement until the foreign operation is sold or the value of investments deemed to have been permanently lost.

If the translation of U.S. dollar is the Functional Currency

If the U.S. dollar is the functional currency of a foreign entity, the financial statements are measured in the currency re-sing into dollars using the temporal method. All profits and losses from transactions entered into the translation process of determining the current earnings. In particular:

a. Assets and liabilities of monetary and nonmonetary assets are valued based on current market prices are translated using the exchange rate as of the date of financial statements, mail and other non-monetary capital accounts are translated based on historical rates.
b. Revenues and expenses are translated using average exchange rates during the period niali, except for non-monetary items are translated using historical rates.

c. Translation gains and losses are reflected in current period earnings.

Foreign Currency Translation When Is a Functional Currency

A foreign entity may use a foreign currency in the accounting records if the functional currency is other foreign currencies. In this situation, the financial statements are presented first birthday of the local currency into the functional currency (temporal method) and then translated into U.S. dollars using the exchange rate now.

Translation of Foreign Currencies and Inflation

An inverse relationship between a country’s inflation rate and the external value of its currency has been demonstrated empirically. As a result, the use of the exchange rate is now to translate non-monetary cost of acquisition of assets located in the air inflation will eventually 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 depreciation are also lower.
FASB rejected before the inflation adjustment process of translation, because it believes that the adjustment is not inconsistent with the historical cost basis of the assessment framework used in the U.S. noted that financial statements. The solution, FAS No. 52 requires the use of the U.S. dollar as the functional currency for overseas operations are located in neighborhoods with hyperinflation (that is countries with cumulative inflation rate exceeds 100 percent over a period of three years).

Translation of Foreign Currency in Other Countries

1. Canada (CICA 1650), the main difference between the standards in Canada (CICA 1650) and FAS No.52 regarding long-term debt denominated in foreign currencies. In Canada, gains and losses from translation are deferred and amortized.
2. England (IAS 21), the main difference between the standards in the UK and the U.S. related to a stand-alone subsidiaries in countries experiencing hyperinflation. In the UK, financial statements must first be adjusted against the price level now and then translated using the exchange rate now.

3. Australia and New Zealand standard published in 1988. When compared with the FAS No.52, Australian standards require the revaluation of non-monetary non-current assets to subsidiaries in countries had high inflation prior to translation.
4. Japan, in recent years has changed the standard by requiring the exchange methods now in all the circumstances, the translation adjustments are presented on the balance sheet in stockholders’ equity.

Now the trend

Foreign currency translation still remains a difficult technical issues and controversial. The number of companies doing international stock listing and follow the IAS, now IFRS or (International Financial Reporting Standards, International Financial Reporting Standards), is increasing and the stock exchanges around the world are under increasing pressure to use IFRS instead of separately domestic standards for recording shares of foreign companies. (Many stock exchanges have been doing this). In the United States, foreign companies are allowed to use the international standard (IAS 21) f instead of the U.S. standard (FAS 52) in foreign currency translation issues. In time, the FASB will probably settle the differences between FAS 52 with IAS 21, with a leaning to the international standards.

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