TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

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TRANSLATION OF FOREIGN CURRENCY FINANCIAL
STATEMENTS
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When a U.S. company prepares its financial
statements, it must include its foreign-based
operationsa) measured in US dollarsb) reported
using GAAP
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The foreign operations may bea) subsidiariesb)
branchesc) other investments of the US firm
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OBJECTIVE OF TRANSLATION PROCESSProvide
information that shows the expected impact of
exchange rate changes on the US companys cash
flows and equity.
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STEPS IN THE TRANSLATION PROCESSReceive
financial statements of foreign subsidiary
(reported in a foreign currency).Restate to
conform to GAAP (on worksheet).Translate amount
in each account into US .Consolidate the
translated accounts with the parents accounts.
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METHODS OF TRANSLATION PERMITTED UNDER
GAAPCurrent Rate MethodTemporal MethodChoice
based on Functional Currency of the foreign
operation.
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FUNCTIONAL CURRENCYThe currency of the
environment in which the entity primarily
generates and expends cash.In highly
inflationary economies, the Functional Currency
must be the US dollar.
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