Currency translation methods for consolidating financial statements

More information is available on this project's attribution page.PDF copies of this book were generated using Prince, a great tool for making PDFs out of HTML and CSS.This helps to reduce the volatility of consolidated earnings.It is also more helpful for management, shareholders and creditors in evaluating a company because losses and gains resulting from the exchange rate are excluded for the consolidate earnings.More details on the process are available in this blog post.For more information on the source of this book, or why it is available for free, please see the project's home page. You may also download a PDF copy of this book (29 MB) or just this chapter (783 KB), suitable for printing or most e-readers, or a file containing this book's HTML files (for use in a web browser offline).Remeasurement and Translation The entire task of foreign currency translation can be understood as determining the correct exchange rate to be used in converting each financial statement line item from the foreign currency to USD.The translation adjustment is an inherent result of this process, in which balance sheet and income statement items are translated at different rates.

ASC 830 (aka FAS 52) provides the accounting and reporting requirements for foreign currency transactions and the translation of financial statements from a foreign currency to the reporting currency.

A method of foreign currency translation where most items in the financial statements are translated at the current exchange rate.

The exception would be income statements items, which are translated at actual exchange rates.

The original standard issued by FASB in 1981 (now Topic 830 in the Accounting Standards Codification) states that if the foreign operation is in control of its operations and financing, then the functional currency would be the local currency of the branch. This analysis leads to the conclusion that either dollars or pounds could be used as the functional currency.

Also, this is a matter of fact and should be based on the currency where the majority of the cash is received and expended. Here the company chose pounds as the functional currency because it is the local currency.

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