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A reporting entity must translate the functional currency financial statements of any foreign entity, whether consolidated or accounted for using the equity method of accounting, to include them in its consolidated financial statements. This is true whether the reporting entity is a parent company or a subsidiary. For example, in a multi-leveled organization with a parent holding company and first- and second-tier subsidiaries, the financial statements of the second-tier subsidiary are first translated for inclusion in the first-tier subsidiary’s financial statements and then those financial statements are translated for inclusion in the parent’s consolidated financial statements.
The steps needed to translate a foreign entity’s financial statements depend on whether the foreign entity’s books and records are maintained in the foreign entity’s functional currency or another currency.
As discussed in ASC 830-10-45-17, when a foreign entity’s books and records are not maintained in its functional currency, the reporting entity must first remeasure the financial statements into its functional currency and then translate the foreign entity’s financial statements into the reporting currency. Figure FX 5-1 summarizes the steps a reporting entity should take to translate the financial statements of its foreign entities into its reporting currency.
Figure FX 5-1
Summary of translation steps
Currency in which the books and records are maintained
Translation steps
Functional currency
Translate the foreign entity’s financial statements from the foreign entity’s functional currency to the reporting currency
See Example FX 5-1
Other than the functional currency
First, remeasure the foreign entity’s financial statements into the foreign entity’s functional currency
Then, translate the foreign entity’s financial statements from the foreign entity’s functional currency to the reporting currency
See Example FX 5-2
A reporting entity should consider whether there are accounts recorded at the parent company level that relate to the foreign entity (e.g., reserves, impairments, goodwill and intangibles, audit adjustments, deferred tax balances). If such accounts exist, the reporting entity should “push down” the balance in the currency in which the foreign entity maintains its books and records (using the historical exchange rate). These accounts would then be remeasured into the foreign entity’s functional currency. This approach provides for comparable treatment of a foreign entity’s accounts whether they are recorded in the foreign entity’s or parent’s books and records.
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