When a reporting entity conducts transactions in more than one currency, preparing financial statements in a single currency requires that changes in the relationship between different units of currency be recognized and measured. ASC 830, Foreign Currency Matters, uses the following two distinct processes to express all of a reporting entity’s transactions in a single reporting currency.
  • Foreign currency measurement–This is the process by which an entity expresses transactions whose terms are denominated in a foreign currency in its functional currency. Changes in functional currency amounts that result from the measurement process are called transaction gains or losses; transaction gains and losses are included in net income.
  • Foreign currency translation–This is the process of expressing a foreign entity’s functional currency financial statements in the reporting currency. Changes in reporting currency amounts that result from the translation process are called translation adjustments; translation adjustments are included in the cumulative translation adjustment (CTA) account, which is a component of other comprehensive income:
The application of the measurement and translation processes starts with an understanding of the following concepts and definitions. Not all terms listed below are defined in the FASB’s Accounting Standards Codification.
Figure FX 1-1 defines common terms used in ASC 830.
Figure FX 1-1
Basic foreign currency terms
Reporting currency
The currency in which a reporting entity prepares its financial statements
Foreign currency
Any currency other than the functional currency of the referenced distinct and separable operation
Foreign entity
A distinct and separable operation whose financial statements are prepared in a currency other than the reporting currency, and that is consolidated, combined, or accounted for on the equity method. A reporting entity must identify its foreign entities to determine which financial statements have to be translated. Distinct and separable operations whose financial statements are prepared in the reporting currency are domestic entities which, by definition, do not need to be translated.
Distinct and separable operation
An operation that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the reporting entity for which a meaningful set of financial statements are routinely prepared
Functional currency
The currency of the primary economic environment in which a distinct and separable operation operates
This chapter of PwC’s Foreign currency guide provides an overall framework for accounting for foreign currency matters.
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