Translation of Foreign Financial

Statements
 IAS 21 – Summary of the Approach
Required by this Standard
The process
Step 1: Determine functional currency for both the parent and any foreign
operations (this will be used for measurement in step 2)

Step 2: Translate items into the functional currency

Step 3: Identify and translate items into the presentation currency

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 IAS 21 – Summary of the Approach
Required by this Standard
Factors to consider in making the step 1 decision:
• Sales
• Regulatory and competitive environment
• Labor and raw materials
• Financing currency
• Operating currency

Additional factors for foreign subsidiaries

• Independence
• Relative volume/size of transactions with parent
• Cash management (direct effect on cash flows of reporting entity)
• Self-sufficiency

If uncertain, management would give priority to the following factor

• Sales markets
• Regulatory and competitive environment
• Labor and raw materials markets

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 Translation

Local Currency FS to Functional Currency FS to

Functional Currency FS Presentation Currency FS

Temporal /
Current / Closing
Remeasurement
Rate Method
Method
 Translation of Foreign Currency Statements
from Functional to Presentation Currency

PAS 21 procedures (if the financial statements are not in the functional currency of
a hyperinflationary economy):

 Assets & Liabilities (including any goodwill arising on the acquisition and any
fair value adjustment) – translated at the closing rate at the date of the
statement of financial position

 Stockholders equity items are translated using historical rates (exchange rates
at the original transaction dates), except retained earnings which is translated by
components. The only time retained earnings is translated by a use of singe
exchange rate is at the date of acquisition, using the exchange rate at that date.

 Income statement – to be translated at the spot rate at the date of the

transactions (for practical consideration – translated at weighted average rate
for the period)

 Exchange differences (translation adjustment) – recognized as component

of other comprehensive income (Cumulative Translation Adjustment)
 Translation of Foreign Currency Statements
from Local to Functional Currency

 Monetary assets and monetary liabilities are translated at current

rate existing at balance sheet date.

 Non monetary assets and non-monetary liabilities are translated

using the exchange rate at the date of the transaction if carried at
historical cost or the exchange rate at the date of revaluation if
carried at fair value.

 Stockholders equity items are translated using historical rates

(exchange rates at the original transaction dates), except retained
earnings which is translated by components. The only time retained
earnings is translated by a use of singe exchange rate is at the date
of acquisition, using the exchange rate at that date.
 Translation of Foreign Currency Statements
from Local to Functional Currency

 Revenues and expenses are translated using the spot exchange

rates at the transaction dates, for practical purposes, a weighted
average current rate is used instead, except of for the following:
 Depreciation expense and amortization expense will be
translated using historical rate of the related fixed asset
 Cost of sales will be translated by components.

 Exchange difference that results from this application is carried to

the income statement either as foreign currency exchange gain or
loss.
Items for Emphasis
Is Philippine Peso
(Foreign Currency) the
YES functional Currency? NO

Use Temporal/ Use Closing/

Remeasurement Current Rate
Method Method

 Monetary items @ Closing rate  Assets and Liabilities at Closing Rate

 Non monetary items @ Historical Rate,
 I/S accounts @ rate on actual
except those revalued (rate on revaluation
date) transaction; weighted average for
 SHE @ Historical Rate, except RE which is simplicity
by component  SHE at historical, except RE which is
 I/S accounts @ rate on actual transaction, by component
except those related to non-monetary items
(@ Historical rate, e.g, Deprt n and COGS) ;
weighted average rate for simplicity
 Goodwill and fair Value Adjustment

IAS 21, par. 47 states:

“Any goodwill arising on the acquisition of a foreign operation and

any fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of that foreign operation shall be
treated as assets and liabilities of the foreign operation. Thus
they shall be expressed in the functional currency of the foreign
operation and shall be translated at the closing rate…”
 Translation of Foreign Currency Statements
under Hyperinflationary Economy

PAS 21 procedures (if the financial statements are in the functional

currency of a hyperinflationary economy):

 All amounts – translated at the closing rate at the date of the most
recent statement of financial position, except that

 When amounts are translated into the currency of a non-

hyperinflationary economy, comparative amounts shall be those that
were presented as current year amounts in the relevant prior year
FS (i.e., not adjusted for subsequent changes in the price level or
subsequent changes in exchange rates).
 Translation of Foreign Currency Statements
under Hyperinflationary Economy

 Use restate-then-translate approach.

 Steps:
Identify Monetary items
Determine Price Index Multiplier (PIM) related
to non-monetary items
Where:
 Multiply Non-Monetary items’ amount to PIM
 Retained Earnings is the balancing figure.