Translation When Foreign Currency Would be the Functional Currency

A foreign entity may preserve its records in 1 foreign currency when its functional currency is another foreign currency. In this scenario, the financial statements are 1st remeasured from the nearby currency into the functional currency (temporal strategy) and then translated into U.S. dollars working with the current rate approach. Assume a German parent firm owns a wholly-owned affiliate in Mexico. The Mexican affiliate subcontracts the majority of its production to Brazilian vendors. Hence, the Mexican affiliate’s functional currency is deemed to be the Brazilian actual. In consolidating the accounts of its Mexican affiliate, the German parent organization would initial remeasure the Mexican accounts from pesos to reals making use of the temporal approach with any translation gains and losses reflected in the reported earnings from the Mexican concern. These actual balances would then be translated to German marks working with the existing rate approach with any translation adjustments arising from this approach reflected in consolidated equity.

An exception to the current rate technique is needed for subsidiaries situated in locations where the cumulative rate of inflation in the course of the preceding three years exceeds 100 percent. In such hyperinflationary conditions, the dollar (the stronger currency) is deemed the functional currency, requiring use of the temporal translation approach. Exactly where an entity has much more than 1 distinct and separable operation (e.g., a branch or division), every single operation may possibly be regarded as as a separate entity with its own functional currency. Therefore, a U.S. parent might have a self-contained manufacturing operation in Mexico developed to serve the Latin American market plus a separate sales outlet for the parent company’s exported items. Below these circumstances, financial statements from the manufacturing operation could be translated to dollars making use of the existing rate technique. The peso statements from the Mexican sales outlet would be remeasured in dollas utilizing the temporal technique.

As soon as the functional currency for a foreign entity is determined, that currency designation should be utilized consistently unless adjustments in economic circumstances clearly indicate that the functional currency has changed. If a reporting enterprise can justify the change, analysts should note that the accounting transform want not be accounted for retroactively.