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4.8 Investments in debt and equity securities denominated in a foreign currency
Publication date: 31 May 2022
us Foreign currency guide
The accounting for a foreign currency denominated investment security will depend on its classification under ASC 320, Investments – Debt Securities or ASC 321, Investments – Equity Securities, and whether it is determined to be a monetary or nonmonetary asset. Debt securities classified as held to maturity are considered monetary assets; the amount to be received at maturity is fixed and does not depend on future prices. Debt securities classified as available for sale or trading are considered nonmonetary assets; the amount to be received depends on future prices. Similarly, an equity security investment within the scope of ASC 321 is considered a nonmonetary asset. See Figure FX 4-2 for a summary of which investment securities are considered monetary and which investment securities are considered nonmonetary.
Despite the fact that certain foreign currency denominated debt and equity securities are considered nonmonetary assets, ASC 320 and ASC 321 require that they be measured at fair value each reporting period. Changes in the fair value of foreign currency denominated investments classified as available for sale due to changes in foreign currency exchange rates should be included in other comprehensive income. Changes in the fair value of debt securities classified as trading and equity securities (which includes changes due to changes in foreign currency exchange rates) should be recognized in the income statement.
Figure FX 4-2 summarizes the subsequent measurement of certain foreign currency denominated investment securities.
Figure FX 4-2
Measurement of foreign currency denominated investment securities
Measurement of foreign currency denominated investment securities
Classification |
Monetary / nonmonetary |
Accounting treatment |
Treatment of changes in foreign currency exchange rates |
Held to maturity (debt securities)
|
Monetary
|
Measured at amortized cost
|
Foreign currency transaction gain or loss is recognized in the income statement
|
Available for sale (debt securities)
|
Nonmonetary
|
Measured at fair value with changes in fair value, excluding the amount recorded in the allowance for credit losses, recorded in other comprehensive income. Amounts related to credit losses are recorded as credit loss expense.
|
Changes in fair value attributable to changes in the exchange rate between the foreign currency and the functional currency are recognized with other changes in fair value in other comprehensive income
|
Trading (debt securities)
|
Nonmonetary
|
Measured at fair value with changes in value recorded in the income statement
|
Changes in fair value attributable to changes in the exchange rate between the foreign currency and the functional currency are recognized in the income statement with other changes in fair value
|
Equity securities* |
Nonmonetary |
Measured at fair value with changes in value recorded in the income statement |
Changes in fair value attributable to changes in the exchange rate between the foreign currency and the functional currency are recognized with other changes in fair value in the income statement |
* Equity securities without a readily determinable fair value may be presented at cost, less impairment, if the measurement alternative is applied. Under that guidance, the historical rate at acquisition should be utilized until a remeasurement event occurs. If the carrying value is adjusted because of either an impairment or an observable price change, the fair value of the instrument should be reflected in the reporting entity’s functional currency based upon the spot rates in effect at the time of the remeasurement event. See LI 2.3.2.4 for more information.
Example FX 4-4 illustrates the accounting for a foreign currency denominated investment security classified as held to maturity. Example FX 4-5 illustrates the accounting for a foreign currency denominated investment security classified as available for sale.
EXAMPLE FX 4-4
Accounting for a foreign currency denominated investment security classified as held to maturity
USA Corp is a US registrant with a US dollar (USD) functional currency.
On October 1, 20X1, USA Corp pays 95,000 euros for a 10-year bond issued by Deutsche AG with a par value of 100,000 euros. The bond pays a coupon of 7.00% semi-annually. Because USA Corp bought the bond at a discount, its effective interest rate is 7.736%. USA Corp designates its Deutsche AG bond as held to maturity.
The following table summarizes the exchange rate on the date USA Corp purchased the Deutsch AG bond and on the date of its financial statements, and the average exchange rate for the reporting period.
Date |
Exchange rate |
October 1, 20X1
|
EUR 1 = USD 1.499252
|
December 31, 20X1
|
EUR 1 = USD 1.401
|
Average exchange rate for Q4 20X1
|
EUR 1 = USD 1.449
|
How should USA Corp measure and record this foreign currency transaction?
Analysis
USA Corp would record the purchase of the Deutsche AG bond in its functional currency using the exchange rate on the purchase date.
EUR 95,000 × (EUR 1/ USD 1.499252) = USD 142,429
Dr. Investment in held-to-maturity security
|
USD 142,429
|
|
Cr. Cash
|
USD 142,429
|
To record Deutsche AG bond in USD using the exchange rate on the date purchased
The following is a simplified bond amortization table in EUR showing the initial purchase on October 1, 20X1 and the interest accrual and discount amortization for the period ending December 31, 20X1. For simplicity, it is assumed that there were no principal and interest payments during the period.
Balance as of 10/1/20X1 |
Quarterly entries |
Balance as of 12/31/20X1 |
|
Bond principal amount
|
EUR 100,000
|
EUR 100,000
|
|
Discount
|
EUR 5,000
|
EUR 4,913
|
|
Discount amortization
|
EUR 87
|
||
Interest accrual
|
EUR 1,750
|
||
Carrying amount
|
EUR 95,000
|
EUR 95,087
|
To prepare its December 31, 20X1 financial statements, USA Corp would first record the interest accrual and amortization of the discount on its Deutsche AG bond using the average exchange rate for Q4 20X1.
Dr. Accrued interest receivable
|
USD 2,536
|
|
Dr. Investment in held-to-maturity security
|
USD 127
|
|
Cr. Interest income
|
USD 2,536
|
|
Cr. Interest income (discount amortization)
|
USD 127
|
To record quarterly accrued interest of EUR 1,750 and amortization of the bond discount of EUR 87 using the average exchange rate during the quarter (EUR 1 = USD 1.449)
Since the interest accrual and held-to-maturity security are monetary assets, they should be measured using the rate on December 31, 20X1. The difference between the accrued interest recorded using the average exchange rate and the accrued interest balance using the exchange rate on December 31, 20X1 is recorded in the income statement as a foreign currency transaction gain or loss.
Accrued interest on 12/31/X1 (EUR) |
Exchange rate |
Accrued interest on 12/31/X1 (USD) |
Recorded accrued interest balance (USD) |
FX transaction gain/(loss) |
EUR 1,750
|
EUR 1 = USD 1.401
|
USD 2,452
|
USD 2,536
|
(USD 84)
|
As a result of measuring the interest accrual using the December 31, 20X1 exchange rate, the following adjustment would be recorded.
Dr. Foreign currency transaction loss
|
USD 84
|
|
Cr. Accrued interest receivable
|
USD 84
|
To record the difference between measuring the quarterly interest accrual of EUR 1,750 at the average exchange rate during the quarter (EUR 1 = USD 1.449) and the period end exchange rate (EUR 1 = USD 1.401)
The bond has been classified as a held-to-maturity security, which is a monetary asset and is required to be measured at the December 31, 20X1 spot rate. The offsetting entry is recorded in the income statement as a foreign currency transaction gain or loss.
Bond carrying amount on 12/31/X1 (EUR) |
Exchange rate |
Bond carrying amount on 12/31/X1 (USD) |
Recorded bond carrying amount (USD) |
FX transaction gain/(loss) |
EUR 95,087
|
EUR 1 = USD 1.401
|
USD 133,217
|
USD 142,556
|
(USD 9,338)
|
As a result of measuring the carrying amount of the bond using the December 31, 20X1 exchange rate, the following adjustment would be recorded.
Dr. Foreign currency transaction loss
|
USD 9,338
|
|
Cr. Investment in held-to-maturity security
|
USD 9,338
|
To record the foreign currency transaction loss resulting from measuring the bond at the exchange rate at the end of the period
EXAMPLE FX 4-5
Accounting for a foreign currency denominated investment security classified as available for sale
Accounting for a foreign currency denominated investment security classified as available for sale
USA Corp is a US registrant with a US dollar (USD) functional currency.
On October 1, 20X1, USA Corp pays 1,400,000 Japanese yen (JPY) for a 10-year bond issued by Nikkei Corp with a par value of JPY 1,400,000. The bond pays a coupon of 5.00% semi-annually on March 30 and September 30. USA Corp designates its Nikkei Corp bond as available for sale.
USA Corp issues annual financial statements as of December 31, 20X1. USA Corp sells its Nikkei Corp bond on January 31, 20X2 for JPY 1,225,000 plus JPY 23,333 in accrued interest due.
The following table summarizes the clean fair value (i.e., excluding the accrued interest) of the Nikkei Corp bond in Japanese yen and US dollars, based on the exchange rate in effect on the date USA Corp purchased the bond, the date of its annual financial statements, and the date it sold the bond. There are no credit related issues with Nikkei Corp. The average exchange rate during Q4 20X1 is JPY 1 = USD 0.014, and for the month of January 20X2, the average rate is JPY 1 = USD 0.012.
Date |
Fair value Nikkei Corp bond (JPY) |
Exchange rate |
Fair value Nikkei Corp bond (USD) |
October 1, 20X1
|
JPY 1,400,000
|
JPY 1 = USD 0.010
|
USD 14,000
|
December 31, 20X1
|
JPY 1, 350,000
|
JPY 1 = USD 0.017
|
USD 22,950
|
January 31, 20X2
|
JPY 1,225,000
|
JPY 1 = USD 0.011
|
USD 13,475
|
How should USA Corp measure and record these foreign currency transactions?
Analysis
USA Corp would record the purchase of the Nikkei Corp bond in its functional currency using the exchange rate on the date purchased.
Dr. Investment in available-for-sale security
|
USD 14,000
|
|
Cr. Cash
|
USD 14,000
|
To record Nikkei Corp bond in USD using exchange rate on the date purchased (JPY 1 = USD 0.010)
To prepare its December 31, 20X1 financial statements, USA Corp would first record the interest accrual and recognize interest income on its Nikkei Corp bond using the average exchange rate for Q4 20X1.
Dr. Accrued interest receivable
|
USD 245
|
|
Cr. Interest income
|
USD 245
|
To record quarterly accrued interest of JPY 17,500 using the average exchange rate during the quarter (JPY 1 = USD 0.014). Bond coupon payments are semi-annual ((JPY 1,400,000 × 0.05) /4) = JPY 17,500 for one quarter
Since the interest accruals on available-for-sale securities are monetary assets, they should be measured using the rate on December 31, 20X1. The difference between the accrued interest recorded using the average exchange rate for recognizing interest income and the accrued interest balance using the exchange rate on December 31, 20X1 is recorded in the income statement as a foreign currency transaction gain or loss.
As a result of measuring the interest accrual using the December 31, 20X1 exchange rate, the following adjustment would be recorded.
Dr. Accrued interest receivable
|
USD 53
|
|
Cr. Foreign currency transaction gains and losses
|
USD 53
|
To record the difference between measuring the quarterly interest accrual of JPY 17,500 at the average exchange rate during the quarter (JPY 1 = USD 0.014) and the period end exchange rate (JPY 1 = USD 0.017)
USA Corp would then record an entry to recognize the difference between the US dollar balance on December 31, 20X1 and the US dollar balance on October 1, 20X1, the date of acquisition. The offsetting entry would be recorded in other comprehensive income as an unrealized gain on investment securities.
Date |
Fair value (JPY) |
Exchange rate |
Carrying amount (USD) |
Accumulated OCI balance (USD) |
10/1/X1
|
JPY 1,400,000
|
JPY 1 = USD 0.010
|
USD 14,000
|
USD 0
|
12/31/X1
|
JPY 1,350,000
|
JPY 1 = USD 0.017
|
USD 22,950
|
USD 8,950
|
To record the sale of the Nikkei Corp bond on January 31, 20X2, USA Corp should first recognize interest income of JPY 5,833 for the month January 20X2 using the average exchange rate for the month. It should then adjust the full accrued interest receivable amount of JPY 23,333 (JPY 17,500 (USD 298) plus JPY 5,833 (USD 70)) to the USD exchange rate at the date of sale. Then, Nikkei Corp should record an entry to recognize the difference between the sales price of the bond on January 31, 20X2 and the carrying value on December 31, 20X1.
Dr. Accrued interest receivable
|
USD 70
|
|
Cr. Interest income
|
USD 70
|
To record one month accrued interest of JPY 5,833 using the average exchange rate for January 20x2 (JPY 1 = USD 0.012). Bond payments are semi-annual JPY 35,000 /6 = JPY 5,833.
Dr. Foreign currency transaction loss
|
USD 111
|
|
Cr. Accrued interest receivable
|
USD 111
|
To record the difference between measuring the January 31, 20x2 interest accrual of JPY 23,333 at the January 31, 20x2 exchange rate (JPY 1 = USD 0.011) of USD 257 and it’s carrying value of USD 368 (USD 245+ USD 53+ USD 70)
Date |
Fair value (JPY) |
Exchange rate |
Carrying amount (USD) |
Accumulated OCI balance (USD) |
12/31/X1 |
JPY 1,350,000 |
JPY 1 = USD 0.017 |
USD 22,950 |
USD 8,950 |
1/31/X2 |
JPY 1,225,000 |
JPY 1 = USD 0.011 |
USD 13,475 |
(USD 525) |
To record the sale of the Nikkei Corp bond, USA Corp would record the cash receipt of JPY 1,225,000 and accrued interest sold of JPY 23,333 and recognize the previously unrealized loss from OCI in earnings.
Dr. Cash
|
USD 13,732
|
|
Dr. Realized loss on investment
|
USD 525
|
|
Cr. Investment in available-for-sale security
|
USD 13,475
|
|
Cr. Other comprehensive income
|
USD 525
|
|
Cr. Accrued interest receivable
|
USD 257
|
To record the sale of the Nikkei Corp bond
Cash (JPY 1,225,000 + JPY 23,333 )× (USD 0.011/JPY 1) = USD 13,732
Accrued interest (USD 245 + USD 53 + USD 70 - USD 111) = USD 257
4.8.1 Available-for-sale debt security impairment—after adoption of ASU 2016-13
An investor in a foreign currency denominated available-for-sale debt security is exposed to the risk that its cost basis in the security will not be recovered because of changes in foreign exchange rates. That is, because the security’s cash flows are received in a foreign currency, but are measured into the investor’s functional currency, the investor may incur a loss due to changes in foreign exchange rates even when all contractual cash flows are received. However, the change in fair value of a foreign currency denominated available-for-sale debt security that is not credit related (e.g., changes in foreign currency exchange rates) are recorded in other comprehensive income. The change in fair value that is related to the allowance for credit losses is recognized in earnings. Unrealized losses related to changes in foreign exchange rates from an investment in a foreign currency denominated available-for-sale debt security that have been reported in other comprehensive income are recognized in earnings only (1) at the maturity of the security, (2) upon the sale of the security, (3) when a reporting entity intends to sell the security, or (4) when a reporting entity is more likely than not required to sell the security before recovery of its amortized cost basis. See LI 8.2.4, LI 8.2.6 and LI 8.2.6.1 for additional information.
4.8.1A Available-for-sale debt security impairment-before adoption of ASU 2016-13
An investor in a foreign currency denominated available-for-sale debt security is exposed to the risk that its cost basis in the security will not be recovered because of changes in foreign exchange rates. That is, because the security’s cash flows are received in a foreign currency, but are measured into the investor’s functional currency, the investor may incur a loss due to changes in foreign exchange rates even when all contractual cash flows are received. As a result, an investor in a foreign currency denominated debt security should analyze whether declines in fair value attributable to changes in foreign currency exchange rates are other than temporary.
To determine whether an available-for-sale debt security denominated in a foreign currency is impaired (i.e., has a fair value below its amortized cost), an investor should compare the security’s fair value and amortized cost amounts as reported in its functional currency. ASC 320-10-35-36 states that the entire change in the fair value of foreign currency denominated available-for-sale debt security should be presented in other comprehensive income. Mechanically, this is accomplished by measuring the security’s fair value in the investor’s functional currency using the current exchange rate, while measuring the security’s amortized cost using the historical exchange rate. Because fair value for financial reporting purposes is measured in the investor’s functional currency, the determination of whether a security is impaired should also be performed using fair value and amortized cost balances in the investor’s functional currency.
When an investor recognizes an other-than-temporary impairment of a foreign currency denominated debt security due to changes in foreign exchange rates that it does not expect to recover, the loss recognized should include the entire difference between the functional currency amortized cost of the investment and its functional currency fair value. This is the accounting treatment because the fair value decline related to changes in foreign exchange rates and is not related to contractual cash flows.
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.
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