Foreign Currency Transactions and Translations (Portfolio 5163)

Bloomberg Tax Portfolio 5163, Foreign Currency Transactions and Translations (Accounting Policy and Practice Series) reviews how a reporting entity: Determines the currency of the economic environment in which it primarily generates and expends cash; Measures any transaction in another currency; and, Includes, in its financial statements, the financial information of an operation that primarily generates and expends cash in the economic environment of another currency. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial.

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.


Bloomberg Tax Portfolio 5163, Foreign Currency Transactions and Translations (Accounting Policy and Practice Series) reviews how a reporting entity:• Determines the currency of the economic environment in which it primarily generates and expends cash;
• Measures any transaction in another currency; and, Includes, in its financial statements, the financial information of an operation that primarily generates and expends cash in the economic environment of another currency.

The Portfolio focuses on authoritative generally accepted accounting principles (GAAP) in the United States as set out in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 830, Foreign Currency Matters (the currency guidance).
This Portfolio does all of the following:• Paraphrases the currency guidance;
• Offers insight into the rationale for, and practical consequences of, the currency guidance;
• Provides context for and observations about illustrative examples set out in the currency guidance;
• At a high-level, notes how International Financial Reporting Standards on currency matters compare and contrast with authoritative GAAP.

The analysis is drawn from review of authoritative GAAP, but also from the supporting project materials of the Financial Accounting Standards Board—for example, the basis for board's conclusions and related dissents and other project documentation.
This Portfolio may be cited as Bloomberg Tax Portfolio 5163, Green, Foreign Currency Transactions and Translations (Accounting Policy and Practice Series).


James F. Green, CPA-IL

Jim is an Illinois CPA who helps people understand generally accepted accounting principles and related subjects. Jim has applied, helped set, and offered insights into GAAP and other professional requirements for over 30 years—
• Analyzing accounting and other principles for clients in industry and public practice;
• Helping the Financial Accounting Foundation create the FASB Accounting Standards Codification® through his analysis, authoring, and editing;
• Developing and communicating accounting technical positions—including positions on financial instruments, derivatives, hedging, securitizations, and foreign currency translation—as a partner in Arthur Andersen's Professional Standards Group;
• Writing guidance on accounting, auditing, and regulatory matters as staff of several financial services committees of the American Institute of Certified Public Accountants;
• Representing the AICPA on accounting and auditing issues before the United States Congress and federal regulatory agencies; and,
• Auditing financial statements as a manager at KPMG.
Jim has a BBA in accounting from the College of William and Mary in Virginia. Jim speaks English and Spanish and devotes his volunteer time to literacy and hunger issues.

Table of Contents

Detailed Analysis
I. Conceptual Overview
Introductory Material
A. The Questions
B. Objectives
C. Key Elements
1. Identifying the Reporting Entity and its Parts
2. Determining the Functional Currency
3. Measuring Foreign Currency Transactions
4. Translating Foreign Currency Financial Statements
D. Convenience Translations
E. Shortcuts
F. Usage and Terms
1. Usage
a. Authoritative GAAP
b. Entity-Level Unit of Account
c. Specification of Currencies
d. Materiality and Significance
e. Currency Risk
f. Monetary Items
g. Financial Statements
2. Terms
a. Books of Record
b. Currency
c. Unit of Measure
d. Functional Currency
e. Local Currency
f. Foreign Currency
g. Currency Baskets
h. Exchange Rate
i. Reporting Entity
j. Reporting Currency
k. Affiliate
l. Control
m. Operation
n. Foreign Entity
II. Functional Currency
Introductory Material
A. Currency
1. Currency as a Unit of Measure
2. Currency in the Denomination of Transactions
B. Initial Determination of Functional Currency
1. Attributes Considered
2. Two-Class Exercise
3. Highly Inflationary Economies
a. Cumulative 3-Year Rate Exceeds 100%
b. Cumulative 3-Year Rate Is 100% or Less
c. Facts and Judgment Needed to Assess Inflation
(1) Center for Audit Quality
C. Changes in Functional Currency
1. Changes in Inflation
a. Economy Becomes Highly Inflationary
b. Economy Ceases to Be Highly Inflationary
D. Remeasuring Books of Record
1. Remeasuring Monetary Items
2. Remeasuring Nonmonetary Items
III. Foreign Currency Transactions
Introductory Material
A. Entity Scope
B. Item Scope
1. Items Not Accounted for as Foreign Currency Transactions
a. Screening for Derivatives and Fair Value Elections
(1) Derivatives
(2) Hybrids
(3) Nonderivatives
2. Items Accounted for as Foreign Currency Transactions
C. Initial Recognition and Measurement
1. Temporary Lack of Exchangeability
D. Subsequent Recognition and Measurement
1. Debt Securities Available for Sale
2. Hedging
3. Intra-Entity Balances
4. Financial Liabilities at Fair Value
5. Deferred Taxes
a. Deferred Foreign Taxes
6. Subsequent Exchange Rate Changes
E. Derecognition
F. Presentation
1. Aggregate Foreign Transaction Gain or Loss
a. Foreign Exchange Dealers
2. Income Taxes Allocated to Other Comprehensive Income
3. Cash Flows Statement
G. Disclosures
1. Aggregate Transaction Gain or Loss for the Period
2. Subsequent Changes in Exchange Rates
3. How Exchange Rate Changes Affect Results of Operations
H. Swapping Debt for Equity With a Foreign Government
1. Base Transaction
2. Alternate Transaction
IV. Translation of Financial Statements
Introductory Material
A. The Reporting Entity
1. Consolidation
2. Combination
3. Equity Method
B. Scope
1. Entity Scope
2. Foreign Currency Financial Statements
C. Exchange Rates
1. Difference in Balance Sheet Dates
2. Multiple Exchange Rates
3. Cash Flows Statement
4. Elimination of Intra-Entity Income and Losses
5. Lack of Exchangeability
6. Shortcuts
D. Translation Adjustments
1. What Exactly Is a Translation Adjustment?
a. Basis for Conclusions in Statement 52
b. Math of a Translation Adjustment
2. Intraperiod Tax Allocation
a. Example: Intraperiod Tax Allocation to Translation Adjustments
3. Derecognition of Translation Adjustments
a. Complete Derecognition
(1) Sale
(A) Step Acquisition
(2) Liquidation
b. Partial Derecognition
c. No Derecognition
(1) Sale of Noncontrolling Interest in Consolidated Subsidiary
(2) Partial Liquidation
d. Effect on Impairment Tests
e. Reclassification Adjustments
E. Deferred Taxes
1. Temporary Differences Drive Deferred Taxes
2. Economy Ceases to be Highly Inflationary
3. Indexing for Inflation
a. Tax Purposes
b. Financial Reporting Purposes
F. Interaction of Translation and Asset Impairment
1. Inventory
a. Inventory Impairment Example
(1) Case A—Writedown on Functional Currency Basis
(2) Case B—No Writedown on Functional Currency Basis
G. Presentation and Disclosure
1. Income Taxes Allocated to Other Comprehensive Income
2. Changes in Cumulative Translation Adjustments
3. Subsequent Exchange-Rate Changes
4. Defined Benefit Plans

Working Papers

Worksheet 1 Cash Flows Statement
Worksheet 2 Investment Companies