Foreign Currency Transactions and Translation Adjustments under U.S. GAAP (ASC 830) and IAS 21

✦ Foreign-currency transactions are first measured at the spot rate on the transaction date and re-measured at each subsequent reporting date, with gains and losses recognised in profit or loss.

✦ Monetary items (cash, receivables, payables) re-measure at the closing rate; non-monetary items carried at historical cost stay at the original spot rate unless held at fair value.

✦ When a subsidiary’s functional currency differs from the parent’s presentation currency, its financial statements are translated and the resulting adjustment is deferred in other comprehensive income until disposal.

✦ Disclosures explain functional-currency judgments, exchange-rate policies, accumulated translation adjustments, and the nature of currency-risk exposures.

We’ll look at how to apply the recognition, measurement, presentation, and disclosure guidance in ASC 830 and IAS 21 to foreign-currency transactions and foreign operations, using step-by-step procedures, journal entries, practical examples, and a disclosure checklist ready for immediate use.

Determining Functional Currency

✦ Functional currency is the currency of the primary economic environment in which an entity operates (ASC 830-10-45 / IAS 21.8).

✦ Evaluate cash-flow indicators, sales prices, financing, and the degree of autonomy from the parent.

✦ Change the functional currency only when underlying economic facts clearly change—rare in practice.

Accounting for Foreign-Currency Transactions

✦ Initial recognition — record the foreign-currency amount translated at the spot exchange rate on the transaction date.

✦ Subsequent re-measurement — at each balance-sheet date: • Monetary items ➔ closing rate; recognise gain or loss in profit or loss. • Non-monetary items at historical cost ➔ historical rate. • Non-monetary items at fair value ➔ rate when fair value was measured; any remeasurement effect follows where the fair-value change is recognised.

✦ Settlement — any difference between the carrying amount and the cash paid generates a final gain or loss in earnings.

Hedge accounting under ASC 815 / IFRS 9 may offset re-measurement volatility if designation and documentation criteria are met.

Example — Purchase and Settlement of Foreign Inventory

A U.S. entity (USD functional currency) buys inventory from a German supplier for €100,000 on 1 March 20X5.

Date	Spot Rate (USD/€)	Event
1 Mar 20X5	1.10	Initial recognition
31 Dec 20X5	1.08	Year-end re-measurement (payable open)
15 Feb 20X6	1.12	Cash settlement

1 March 20X5 — initial recognition

Dr. Inventory – 110,000 / Cr. Accounts Payable – 110,000

31 December 20X5 — year-end re-measurement

Required carrying value: €100,000 × 1.08 = $108,000.Current carrying value: $110,000 → recognise a $2,000 gain:

Dr. Accounts Payable – 2,000 / Cr. Foreign-Currency Gain – 2,000

15 February 20X6 — settlement

Cash paid: €100,000 × 1.12 = $112,000.Carrying value: $108,000 → recognise a $4,000 loss:

Dr. Accounts Payable – 108,000Dr. Foreign-Currency Loss – 4,000 / Cr. Cash – 112,000

Translating Foreign Operations

When a subsidiary’s functional currency ≠ parent’s presentation currency, use the current-rate method:

Item	Translation Rate	Result in Equity
Assets & Liabilities	Closing rate	—
Share Capital & Retained Earnings	Historical rates	—
Income & Expenses	Average rate (unless volatile)	—
Translation Difference	—	Accumulated Other Comprehensive Income (AOCI)

Translation adjustments remain in equity until the parent disposes of the foreign operation, triggering reclassification to profit or loss (ASC 830-30-40 / IAS 21.48).

Example — Translating a EUR Subsidiary Balance Sheet (31 Dec 20X5)

Item (EUR)	Local Amount	Rate	USD
Cash	50,000	1.05	52,500
Inventory	120,000	1.05	126,000
Plant & Equipment (hist. 1.00)	200,000	1.00	200,000
Total Assets	370,000	—	378,500
Liabilities	140,000	1.05	147,000
Share Capital (hist. 1.00)	150,000	1.00	150,000
Retained Earnings (avg. 1.02)	80,000	1.02	81,600
Translation Difference (OCI)	—	—	–153,900
Total Equity & Liabilities	370,000	—	378,500

The –$153,900 plug represents the cumulative translation adjustment reported in AOCI.

Presentation in the Financial Statements

✦ Income Statement — foreign-currency gains and losses from re-measurement appear in Other income/expense unless hedge accounting changes the presentation.

✦ Statement of Comprehensive Income — translation adjustments flow through OCI, net of tax.

✦ Balance Sheet — accumulated translation adjustments aggregate within equity, separate from retained earnings.

✦ Cash-Flow Statement — translate operating cash flows at average rates; financing and investing flows use the actual rates on transaction dates.

Disclosure Requirements

✦ Exchange-rate policies — principal rates used, whether averages or closing rates.

✦ Functional-currency judgments — rationale for selecting functional and presentation currencies, and any changes.

✦ Foreign-currency gains and losses — amount recognised in profit or loss during the period.

✦ AOCI roll-forward — beginning balance, current-period translation adjustments, reclassifications, and ending balance.

✦ Hedging information — nature of hedges, risk-management objectives, and the impact on the financial statements.

✦ Concentration of currency risk — quantitative exposure to significant currencies and sensitivity analysis (public companies).