What Is a Foreign Currency Translation?

Foreign currency conversion refers to changing the currency presentation method of the book statement. It is to change the statement expressed in the currency of a certain country to a statement re-expressed in the currency of another country with the equivalent value. It does not exist the transfer of physical currency, nor the economic business of currency exchange.

Foreign currency translation

Right!

Foreign currency conversion refers to changing the currency presentation method of the book statement. It is to change the statement expressed in the currency of a certain country to a statement re-expressed in the currency of another country with the equivalent value. It does not exist the transfer of physical currency, nor the economic business of currency exchange.

Within a multinational company, the holding company and its foreign subsidiaries use currencies of different countries or regions. When the foreign subsidiary's debt is guaranteed to be repaid by the parent company, the creditors of the subsidiary are most concerned about not the financial statements of the subsidiary itself, but the consolidated financial statements of the entire multinational company. Managers of multinational companies also need to evaluate the operating results of the entire company and make decisions based on the consolidated accounting statements.

When the parent company compiles the consolidated financial statements, it usually uses the currency of the country or region where the parent company is located as the reporting currency, and uses a single equivalent currency to re-express various foreign currency amounts.

Foreign currency translation does not change the inherent value of the asset or liability being measured, nor does it change its historical cost. It only changes the currency measurement unit of the subsidiary's related items in the consolidated statement.

Chinese name

Foreign currency translation

Foreign name

Foreign currency translation

Definition

Change the currency representation of the book report

Adjustment

An adjustment item for shareholders' equity

Method

Non-current, time

For many multinational corporations, one adjustment item for shareholder equity is foreign currency translation adjustment. Multinational companies operate both abroad and domestically, so some economic transactions are counted in foreign currencies. When preparing to issue a statement in the home country (US), the transaction reflected in the foreign currency must be converted into currency. Foreign currency conversion is to reflect the financial statements and operating results expressed in foreign currencies into the local currency for the needs reflected in the statements. ^[1]

Foreign currency conversion methods include the following: ^[2]

(1) Flowing and non-flowing. It is the traditional classification of assets and liabilities into two categories: current and non-current. All assets that are consumed, dissipated or converted into other assets or sold within one year or during the normal operating cycle are regarded as current assets. Various liabilities that must be paid within one year or during the normal operating cycle are regarded as current liabilities. Current assets and current liabilities are converted into domestic equivalent currencies at the exchange rates prevailing at the balance sheet date. Non-current assets and non-current liabilities are converted at the exchange rate prevailing at the time the asset was acquired and when the liability was established, which is the historical exchange rate. Depreciation and amortization of non-current assets are converted at the same exchange rate of the relevant assets converted into the national currency.

(2) Monetary non-monetary law. It is to divide assets and liabilities into two categories: monetary and non-monetary. Monetary items are generally expressed in terms of the currency of the item, and there are generally no pricing issues. Such as cash, accounts receivable. Bills payable, etc. Monetary non-monetary law requires monetary assets and liabilities to be converted into domestic equivalent currencies at the exchange rate prevailing at the balance sheet preparation date; non-monetary assets and liabilities are translated at the historical exchange rate, which is the exchange rate applicable at the time of asset purchase or liability.

(3) Time method. The time method requires cash, receivables and payable items (including current and non-current) to be converted at the current exchange rate at the balance sheet preparation date, and all other assets and liabilities to be converted at the current exchange rate and historical exchange rate, respectively, according to their characteristics. That is, all other assets and liabilities measured in currency prices should be converted at the foreign exchange rate on the date of the currency prices. In this way, assets and liabilities recorded at the historical cost (past exchange price) of foreign subsidiary companies are converted at historical exchange rates, and assets and liabilities recorded at the current value (current exchange price or future exchange price) are converted at current exchange rates and market prices Valuation of inventories is based on current exchange rates and not historical exchange rates. This conversion method enables the converted assets and liabilities to maintain the original measurement basis when the transaction occurred.

(4) Current exchange rate law. The current exchange rate method is to use the exchange rate at the time of checkout to convert all assets and liabilities of foreign affiliates, all operating income and expenses in accordance with the current exchange rate. It maintains the original cost of foreign currency items in the domestic currency statement. It can be seen from the above-mentioned various methods of foreign currency conversion that using different conversion methods for assets and liabilities will produce different calculation results. To ensure that the operating results in the consolidated statements are not distorted, a correct and applicable foreign currency conversion method must be selected.