Search within this section
Select a section below and enter your search term, or to search all click Foreign currency
Favorited Content
4.4 Subsequent measurement of foreign currency transactions
Publication date: 31 May 2022
us Foreign currency guide
The accounting for a foreign currency transaction after initial recognition depends on whether the asset or liability created is considered monetary or nonmonetary.
4.4.1 Measurement of monetary and nonmonetary assets and liabilities
Determining whether an asset or liability is considered monetary or nonmonetary is the first step in applying the measurement provisions in ASC 830.
The ASC Master Glossary defines foreign currency, monetary assets and liabilities, and nonmonetary assets and liabilities.
Definitions from ASC Master Glossary
Monetary Assets and Liabilities: Monetary assets and liabilities are assets and liabilities whose amounts are fixed in terms of units of currency by contract or otherwise. Examples are cash, short- or long-term accounts and notes receivable in cash, and short- or long-term accounts and notes payable in cash.
Nonmonetary Assets and Liabilities: Nonmonetary assets and liabilities are assets and liabilities other than monetary ones. Examples are inventories; investments in common stocks; property, plant, and equipment; and liabilities for rent collected in advance.
Foreign currency denominated monetary assets and liabilities are settled in the foreign currency at a future date. Settlement of foreign currency denominated monetary assets and liabilities has a direct impact on an entity’s functional currency cash flows (i.e., the amount of cash, in terms of the entity’s functional currency, received or paid at settlement will vary with foreign currency exchange rates). By their inherent nature, nonmonetary assets and liabilities do not result in future settlements in a foreign currency. For example, once purchased, a fixed asset will only be depreciated or impaired. If the fixed asset is later sold, the cash or accounts receivable received in exchange are considered monetary assets, but that designation does not change the fixed asset’s nonmonetary nature.
When determining whether an asset or liability is monetary or nonmonetary, a reporting entity should consider the guidance in ASC 830-10-45-18 and ASC 255, Changing Prices. While ASC 255 was not specifically created to be applied to foreign currency transactions, the information is helpful in distinguishing assets and liabilities as monetary or nonmonetary. ASC 255-10-20 also provides definitions of monetary assets and liabilities while ASC 255-10-50-51 and 50-52 provide examples.
Definition from ASC 255-10-20
Monetary Assets: Money or a claim to receive a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods or services.
Monetary Liability: An obligation to pay a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods and services.
Excerpt from ASC 255-10-50-51
The economic significance of nonmonetary items depends heavily on the value of specific goods and services. Nonmonetary assets include all of the following:
- Goods held primarily for resale or assets held primarily for direct use in providing services for the business of the entity.
- Claims to cash in amounts dependent on future prices of specific goods or services.
- Residual rights such as goodwill or equity interests.
Nonmonetary liabilities include both of the following:
- Obligations to furnish goods or services in quantities that are fixed or determinable without reference to changes in prices.
- Obligations to pay cash in amounts dependent on future prices of specific goods or services.
4.4.2 Measurement of monetary assets and liabilities
Foreign currency denominated monetary assets and liabilities should be measured at the end of each reporting period using the exchange rate at that date. The offsetting entry should generally be recorded in the income statement as a foreign currency transaction gain or loss as discussed in ASC 830-20-35-1 and ASC 830-20-35-2.
Example FX 4-2 illustrates the subsequent measurement of a monetary liability.
EXAMPLE FX 4-2
Measurement and settlement of a monetary liability
Measurement and settlement of a monetary liability
USA Corp is a US registrant with a US dollar (USD) functional currency.
On August 1, 20X1, USA Corp purchases office printers (capitalized assets) on account for 1,000 British pound sterling (GBP).
USA Corp issues quarterly financial statements on September 30, 20X1, and pays its GBP 1,000 account payable to the counterparty on October 15, 20X1. The exchange rates are shown in the following table.
Date |
Exchange rate |
August 1, 20X1
|
USD 1.5 = GBP 1
|
September 30, 20X1
|
USD 1.4 = GBP 1
|
October 15, 20X1
|
USD 1.3 = GBP 1
|
How should USA Corp measure and record this foreign currency transaction (a) in its quarterly financial statements for the quarter ended on September 30, 20X1, and (b) upon settlement of its account payable on October 15, 20X1?
Analysis
The GBP denominated account payable is a monetary liability. To prepare its September 30, 20X1 financial statements, USA Corp must first measure the foreign currency account payable using the exchange rate on that date.
GBP 1,000 × (1.4/ 1) = USD 1,400
USA Corp would then record an entry to recognize the difference between the US dollar balance on September 30, 20X1, and the US dollar balance on August 1, 20X1 (USD 1,500), the date the initial account payable was recognized. The offsetting entry is recorded in the income statement as a foreign currency transaction gain.
Dr. Accounts payable
|
USD 100
|
|
Cr. Foreign currency transaction gain
|
USD 100
|
To record the settlement of its account payable with UK PLC on October 15, 20X1, USA Corp would first measure its foreign currency account payable using the exchange rate on that date.
GBP 1,000 × (1.3/ 1) = USD 1,300
USA Corp would then record an entry to recognize the difference between the US dollar balance on September 30, 20X1 (USD 1,400), the most recent reporting date, and the US dollar balance on October 15, 20X1. The offsetting entry is recorded in the income statement as a foreign currency transaction gain.
Dr. Accounts payable
|
USD 100
|
|
Cr. Foreign currency transaction gain
|
USD 100
|
Finally, to record the payment of GBP 1,000 and relieve the account payable, USA Corp would record the following entry.
GBP 1,000 × (1.3/ 1) = USD 1,300
Dr. Accounts payable
|
USD 1,300
|
|
Cr. Cash
|
USD 1,300
|
No changes are recorded to USA Corp’s nonmonetary office printer asset balance, which is initially measured and recorded in US dollars and is not adjusted for subsequent changes in foreign currency exchange rates.
ASC 830-20-35-8 provides guidance regarding changes in exchange rates occurring after the end of the reporting period.
A reporting entity’s financial statements shall not be adjusted for a rate change that occurs after the date of the reporting entity’s financial statements.
If there is a significant change in a foreign currency exchange rate, and the affected foreign currency transactions are material to the reporting entity, disclosure as a nonrecorded subsequent event should be considered. See FSP 28 for further information on financial statement disclosures related to subsequent events.
4.4.3 Foreign currency gain and loss recognition exceptions
ASC 830-20-35-3, ASC 830-20-35-4, and ASC 830-20-35-5 list transactions for which foreign currency transaction gains and losses are not required to be recognized in the income statement. Figure FX 4-1 summarizes these exceptions.
Figure FX 4-1
Foreign currency transaction gains and losses not recognized in the income statement
Foreign currency transaction gains and losses not recognized in the income statement
Exception |
Treatment |
Additional guidance |
Net investment hedges
|
As discussed in ASC 815-35-35-1, the gain or loss on an instrument that is designated and effective as a hedge of a net investment in a foreign entity is recorded in the cumulative translation adjustment account.
|
See DH 8.6 for further information on net investment hedging.
|
Long-term intercompany transactions that are not expected to be settled in the foreseeable future (i.e., are of a long-term- investment nature)
|
As discussed in ASC 830-20-35-3b, any foreign currency transaction gain or loss related to intercompany balances for which settlement is not planned or anticipated in the foreseeable future is eliminated from earnings in translation of the financial statements and is recorded as CTA in a set of consolidated financial statements. However, this transaction gain or loss is recognized as a foreign currency transaction gain or loss in the income statement of the standalone financial statements of the foreign entity.
|
See FX 7 for further information on intercompany foreign currency transactions.
|
4.4.4 Nonmonetary assets and liabilities
Nonmonetary assets and liabilities are not subsequently remeasured. Once purchased or incurred, nonmonetary assets and liabilities are accounted for in the functional currency of the purchaser. Similarly, amounts recognized in the income statement related to nonmonetary assets and liabilities, such as cost of goods sold and depreciation, are recorded in the functional currency of the purchaser. See Example FX 4-3 for an illustration of the accounting for fixed asset depreciation where the fixed asset was originally purchased in a foreign currency.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
