Foreign Currency Translation

FOREIGN CURRENCY TRANSLATION
Foreign operations
A foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting
entity, the activities of which are based or conducted in a country or currency other than those of the
reporting entity.
Conversion versus Translation

Conversion is the process of exchanging amounts of one foreign currency for another. For foreign
currency transactions with and without hedging, the more appropriate term used is conversion to
determine gain or loss on foreign currency brought about by the fluctuation in exchange rates.
Foreign currency translation, as distinguish from conversion, does not involve the act of exchanging one
currency for another. Translation is required at the end of the accounting period when a company still
holds assets or liabilities in its balance sheet which were obtained or incurred in a foreign currency.
Presentation Currency versus Functional Currency

For the purpose of translation, it is necessary to distinguish between the presentation currency and the
functional currency.
A stand-alone entity is required to determine its functional currency and record its transactions in that
currency. It is free, however, to present its financial statements in any currency. The currency in which
the financial statements are presented is called the presentation currency.
In most cases, a stand-alone entity's presentation currency is also its functional currency. For example,
international Container Terminal and Services, Inc (ICTSI) the functional and presentation currency Is the
US dollar. It may, if it chooses, present its financial statements in Philippine peso.
In the case of a group entity (a parent and its subsidiaries), the presentation currency of the group is the
presentation currency of the parent company, which is the reporting entity. It can be reasonably
assumed that the parent's functional currency is also its presentation currency. Thus, the presentation
currency of a foreign operation (subsidiary) of a Philippine parent company is the parent's reporting
currency (the Philippine peso).
Translation to the presentation currency

PAS 21 requires an entity, whether (a) a stand-alone entity, (b) an entity with foreign operations (e.g., a
parent) or (c) a foreign operation (e.g., subsidiary or branch), to determine its functional currency and
translates foreign currency items into its functional currency when preparing its financial statements.
However, PAS 21 allows an entity to present its financial statements in any presentation currency.
Example 1:
ABC Co. is a stand-alone entity (i.e., it is not part of a group).
 ABC shall determine its functional currency and prepare its financial statements using
that currency. However, ABC is permitted to translate its financial statements and re-
present them in any other currency (presentation currency).
Example 2:
ABC Co. is a parent based in the Philippines. It has a subsidiary based in Hongkong.
 ABC Co. and the subsidiary shall each determine its functional currency and each shall
prepare its separate financial statements based on its functional currency. If the
subsidiary's functional currency is different from the parent, the subsidiary's financial
statements shall be translated to the parent's presentation currency so that
consolidated financial statements may be presented.
Translation procedures
The financial statements of an entity whose functional currency is not the currency of a
hyperinflationary economy shall be translated into a different presentation currency using the following
procedures:
a. Assets and liabilities are translated at the closing rate at the date of the statement of financial
position.
b. Income and expenses, including other comprehensive income, are translated at spot exchange
rates at the dates of the transactions. For practical reasons, average rates for a period may be
used, if they provide a reasonable approximation of the spot rates when the transactions took
place. However, if exchange rates fluctuate significantly, the use of the average rate is
inappropriate.
c. The resulting exchange difference is recognized in other comprehensive income.
PAS 21 states that the exchange differences are not recognized in profit or loss because the changes in
exchange rates have little or no direct effect on the present and future cash flows from operations. It
would therefore be misleading to include them in profit or loss.
The cumulative amount of the exchange differences is presented in a separate component of equity
until disposal of the foreign operation. On disposal, the cumulative exchange differences are reclassified
from equity to profit or loss as a reclassification adjustment, when the gain or loss on disposal is
recognized.

Foreign Currency Translation

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Foreign Currency Translation

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FOREIGN CURRENCY TRANSLATION

Conversion versus Translation

Presentation Currency versus Functional Currency

Translation to the presentation currency

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