Foreign Currency Transactions and Translation Adjustments under U.S. GAAP (ASC 830) and IAS 21
- Graziano Stefanelli
- May 4
- 3 min read
✦ 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.
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:
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)
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).
