If the functional currency will be the foreign currency in which the foreign entity’s records are kept, its economic statements are translated to dollars making use of the current rate technique. Resulting translation gains or losses are disclosed in a separate component of consolidated equity. This preserves the financial statement ratios as calculated from the nearby currency statements. The following current rate procedures are utilised:
- All foreign currency assets and liabilities are translated to dollars applying the exchange rate prevailing as with the balance sheet date; capital accounts are translated at historical rates
- Revenues and expenses are translated using the exchange rate prevailing on the transaction date, while weighted average rates is usually utilised for expediency.
- Translation gains and losses are reported in a separate component of consolidated stockholders’ equity. These exchange adjustments do not go into the income statement until the foreign operation is sold or the investment is judged to have permanently lost value.
