FOREIGN CURRENCY TRANSLATION

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 that translation is simply a change of monetary units, such as on a balance sheet that is expressed in British pounds are presented again 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

              I.      Conversion, an exchange of one currency into another currency.

            II.      Exchange rate now, the exchange rate prevailing on the date of the relevant financial reporting.

          III.      Net asset position at risk, the excess assets are measured or denominated in foreign currency and in translation at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.

          IV.      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.

            V.      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

          VI.       Historical exchange rate, the exchange value of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.

        VII.      Reporting currency, the currency used in preparing the company financial statements.

      VIII.      Spot exchange rate, the exchange rate for currency exchange in the time immediately.

          IX.       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

-          Attributes, quantitative characteristics of an item being measured for accounting purposes. Example, historical cost and replacement cost which is an attribute of an asset.

-          Conversion, exchange a currency into another currency.

-           Present exchange rate, exchange rate prevailing on the date of the relevant financial statements.

-          Discount, while the subsequent exchange rate lower than current levels.

-           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.

-          Foreign currency, a currency other than the currency used by a State, a currency other than the reporting currency used by the company.

-          Financial statements in foreign currencies, the financial statements using foreign currency as the unit of measurement.

-          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.

-          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.

-          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.

-          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.

-          Functional currency, the currency used by major companies in the course of business, and in generating or using cash.

-          Historical exchange rate, exchange rate of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.

-          Local currency, the currency of a State that is used; the reporting currency used by a domestic or foreign operations.

-          Items of monetary policy, the obligation to pay or the right to receive a unit of currency in a fixed value in the future.

-          Reporting currency, the currency used in preparing the company financial statements.

-          Completion date, the date when the debt is paid by an uncollectible receivables.

-          Spot exchange rate, exchange rate for currency exchange in the time immediately.

-          Date of the transaction, the date when a transaction is recorded in the accounting records of the reporting company.

-          Translation adjustments, adjustments arising from the translation of financial statements of a company's functional currency into the reporting currency.

-          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

·         Suspension

·         suspension and Amortization

·         Partial Suspension

·         No deferred

Translation gains and losses reflect the increase or decrease in equity investments in domestic currency and should be recognized.

5)      Effect of foreign currency translation method to the Financial Statements

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.

a.      Methods Single Currency

b.      Multiple methods of exchange rate

c.       Now the present method and Non

d.      Monetary-non monetary method

e.      Temporal method

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.

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 inflation 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 depreciation 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 actual 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 FASB 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.