Foreign

Currency
Translations
Reported by:

Gwapa

Steps in the translation and

consolidation of foreign entity

1. Receive foreign entitys financial statements, which are reported in foreign

currency

2. Translate the statements in foreign currency to Philippine peso. Each foreign

entity account balance must be individually translated into its Philippine peso
equivalent as follows:

Account in
foreign
currency
units

Appropriate
exchange
rate

Account in
Philippine
peso
equivalent
value

3. Consolidate the translated foreign entitys accounts, which are now stated
in Philippine peso, with the Philippine companys accounts

Comparison of the Two Methods

Balance Sheet

Current/Closing Rate
Method

Remeasurement
(temporal) Method

Monetary assets and

liabilities

Current/closing rate

Current/closing rate

Non-monetary items at
historical cost

Current/closing rate

Historical rate

Non-monetary items at
Fair value

Current/closing rate

Rate at the date of the

revaluation or fair value
determination*

Capital stocks and preacquisition retained

earnings

Historical (or actual)

rate

Historical (or actual)

rate

Comparison of the Two Methods

Balance Sheet

Current/Closing Rate
Method

Remeasurement
(temporal) Method

Post-acquisition
retained Earnings

Not translated using a

single exchange rate.
This is a cumulative
figure that is carried
forward from year to
year

Not translated using a

single exchange rate.
This is a cumulative
figure that is carried
forward from year to
year

Translation gains nor

losses

Other comprehensive
income (FCT G/L)

Taken to income
statement as gains or
losses; remeasurement
gain or loss arising from
the revaluation of a
non-monetary items is
taken to OCI if the
revaluation G/L are

Income Statement

Current/Closing Rate
Method

Remeasurement
(temporal) Method

Sales, purchases,
expenses and income
items that result to
outflow or inflow of
monetary items

Historical rate or actual

rate (average rate may
be used for practical
purposes)

Historical rate or actual

rate (average rate may
be used for practical
purposes)

Cost of Sales

Historical rate or
actual rate at the date
when inventory is sold or
average rate if the cost
of sales is evenly spread
out

Historical rate or
actual rate at the date
when inventory is sold or
average rate if the cost
of sales is evenly spread
out

Depreciation,
amortization and any
other allocation of nonmonetary items

Historical or actual
rate at the date when
the expense is incurred,
or average if the
expense is incurred
evenly throughout the
year

Historical rate of
original acquisition
(either at the date of
purchase for historical
cost items or the date of
valuation for items
carried at fair value)

Dividends and other

Historical or Actual rate

Rate at the date of the

Translation to Currency of Reporting

Entity Per Account Classification
Assets

Current/Closing
Method
Exchange Rate

Temporal
Method
Exchange
Rate

Current

Current

Current
Current

Historical
Historical

Marketable securities carried at fair

value (N)

Current

Current

Accounts and notes receivable and

related unearned discounts (M)

Current

Current

Allowance for uncollectible accounts

Current

Current

Cash, demand deposits, and time

deposits (M)
Marketable securities carried at cost
(N)
Equity securities
Debt securities

Assets

Inventories (N)
Carried at cost
Carried at lower of cost or
market

Current/Closing
Method Exchange
Rate

Temporal
Method
Exchange Rate

Current
Current

Historical
*

Prepaid insurance, advertising,

and rent (N)

Current

Historical

Prepaid interest (M)

Current

Current

Refundable deposits (M)

Current

Current

PPE (N)

Current

Historical

Accum. Depreciation on PPE

(N)

Current

Historical

Cash surrender value of life

insurance (M)

Current

Current

Patents, trademarks, licenses

and formulas (N)

Current

Historical

Goodwill (N)

Current

Historical

Other intangible assets (N)

Current

Historical

Assets

Current/Closing
Method Exchange
Rate

Temporal
Method
Exchange Rate

Deferred charges and credits,

except deferred income taxes
and policy acquisition cost for
life insurance companies (N)

Current

Historical

Deferred income taxes (N)

Current

Current

Liabilities

Current/Closing
Method Exchange
Rate

Temporal
Method
Exchange Rate

Accounts and notes payable

and overdrafts (M)

Current

Current

Accrued expenses (M)

Current

Current

Liability of refundable
expenses (M)

Current

Current

Non-refundable deposits (N)

Current

Historical

Deferred income tax liabilities

(N)

Current

Current

Deferred/Unearned revenue (N)

Current

Historical

Other deferred credits (N)

Current

Historical

Bonds payable and other long

term debt (M)

Current

Current

Stockholders equity

Current/Closing
Method Exchange
Rate

Temporal
Method
Exchange Rate

Common stock (N)

Historical

Historical

Preferred stock carried at

issuance price (N)

Historical

Historical

Other paid-in capital (N)

Historical

Historical

Retained earnings (residual

amount)

Not translated

Not remeasured

The use of historical rates to translate capital stocks and pre-acquisition RE

serves its two purposes:
1. To ensure that in the consolidation worksheet, the share capital and RE
will be cleanly eliminated against the cost of investment to arrive at
goodwill as of the date of acquisition
2. To throw out the cumulative translation difference from the date of
acquisition.

Income Statement related to monetary Items

Sales, purchase, expenses and income items that
result to outflow or inflow of monetary items

Average

Average

Income statement items related to nonmonetary items

Cost of goods sold

Average

Historical

Depreciation on PPE

Average

Historical

Amortization of intangible items (e.g. patents)

Average

Historical

Amortization of deferred income taxes

Average

Current

Amortization of deferred charges and credits

Average

Historical

Amortization of policy acquisition costs for life

insurance companies

Average

Historical

BACK

Illustration: Translation of Foreign

Subsidiarys Financial Statement

Assume that on January 2, 20x4, P Company, a Philippine based

company, acquired for US$ 2,000,000 an 80% interest in S Company
maintains its books in US dollars and they are in conformity with GAAP
in the Philippines (parents functional and presentation currency is the
peso). S companys financial statements are prepared in the local
currency unit (the foreign currency unit dollars).

Exchange rate for the US dollars for the 20x4 fiscal year are as follows:
Date

Spot Rate

January 2, 20x4 (date of acquisition)

40.00

September 1, 20x4

40.10

December 31, 20x4

40.25

Average for the fourth quarter

40.22

Average for the year

40.20

Translation into the presentation

currency (Current/Closing Rate
Method)

Functional Currency is local Currency Unit US Dollars

Rates

Functional Currency is Local Currency Unit - US Dollars

Combined Statement of
Transaction
Adjusted
Adjusted Trial
Income and Retained
Exchange Trial Balance
Balance ($)
Earnings
Rate
(Pesos)
Sales

3,020,000

Cost of Goods Sold

1,850,000

Depreciation Expense

100,000

Other Expenses

655,000

Income Tax Expense

Net Income to RE

A
A
A
A
A

82,000

40.20
40.20
40.20
40.20
40.20
1

333,000
H

40.10

121,404,000
74,370,000
4,020,000
26,331,000
3,296,400
13,386,600
19,200,000
32,586,6

Retained Earnings 1/1

480,000

Total
Less: Dividends declared
9/1/20x4

813,000

12,030,000

300,000

20,556,600

Balance sheet
Cash

930,000

Accounts Receivable

608,000

Inventory (FIFO)

830,000

Land

500,000

Buildings (net)

650,000

Equipment (net)

430,000

Total

3,948,000

Accounts Payable

640,000

Short-term notes payable

635,000

C
C
C
C
C
C

C
C
C
H
H

40.25
40.25
40.25
40.25
40.25
40.25

37,432,500
24,472,000
33,407,500
20,125,000
26,162,500
17,307,500
158,907,00
0

40.25
40.25
40.25
40.00
40.00

25,760,000
25,558,750
36,225,000

Bonds payable

900,000

Common stock, P10 par

960,000

38,400,000

Paid-in Capital in excess of par

300,000

12,000,000

RE, from above

513,000

406,650
20,556,600
158,907,00

Verification of the Translation Adjustment

Current/Closing rate method (Direct Method)
US $
1/2 Exposed net asset position

1,740,000

Translation Reporting
Exchange Currency
Rate
(Pesos)
40.00

adjustments for changes in net asset

position during year:
Net Income for the year
Dividends declared

333,000
(300,000)

40.20
40.10

Net asset position translated using rate in

effect at the date of each transaction
12/31 Exposed net asset position
Change in cumulative translation
adjustment during the year -- net increase
1/2 Cumulative translation adjustment
12/31 Cumulative translation adjustment

69,600,000

13,386,600
(12,030,000)
70,956,600

1,773,000

40.25
71,363,250
406,650
0
406,650

Back

Condensed Balance Sheet for S Company on Jan 2, 20x4 :

Monetary assets - - - - - - - - 1,100,000

Monetary Liabilities - - - - - - - 1,800,000

Nonmonetary assets

Common stock - - - - - - - - - -

960,000

Paid-in capital in
excess of par - - - - - - - - - - - -

300,000

Retained Earnings -- - - - - - - -

480,000

Inventory - - - - - - - - - - -

760,000

Fixed Assets - - - - - - - - - 1,680,000

Total

3,540,000

Total

Net Assets: 3,540,000 1,800,000 = $1,740,000

3,540,000

Statement of Comprehensive Income

S Company
Statement of Comprehensive Income
For the Year ended Dec. 31, 20x4
Net Income
Other Comprehensive Income
Comprehensive Income

P 13,386,600
406,560
P 13,379,250

S Company
Statement of Shareholders Equity
For the Year ended Dec. 31, 20x4
Common
Stock
Balance, 1/1/20x4
Comprehensive
income:
Net Income
OCI

P 38,400,00

Paid-in
Capital in
excess of
par

Retained
Earnings

P
12,000,000

P
19,200,000

P
13,386,600

OCI

Total
P0

406,650

P
69,600,000

P
13,386,600
406,650

Comprehensive
Income

Dividends
declared

P 83,393,
290
(12,030,00
0)

(12,030,000
)

Translation into the Functional

Currency (Remeasurement or temporal
method)

Functional currency is Philippine peso

bbxnj
Functional Currency is Local Currency Unit - US Dollars
Combined Statement of
Transaction
Adjusted
Adjusted Trial
Income and Retained
Exchange Trial Balance
Balance ($)
Earnings
Rate
(Pesos)
Sales

3,020,000

Cost of Goods Sold

1,850,000

Depreciation Expense

100,000

Other Expenses

655,000

Income Tax Expense

40.20

H
A
A

schedule
40.00

40.20
40.20

3,296,400
13,575,200

82,000

NI before remeasurement loss

Remeasurement loss - Dr

121,404,000
74,201,400
4,000,000
26,331,000

201,850
13,373,350

0
H

40.00

Net Income to RE

333,000

Retained Earnings 1/1

480,000

Total
Less: Dividends declared
9/1/20x4

813,000

12,030,000

300,000

20,543,350

19,200,000
32,573,350

US ($)

Translation
Exchange
Rate

Verification of the Translation

1/2 Exposed Net monetary liability
700,000
40.00
position adjustment (temporal method)

Reporting
Currency
(pesos)
28,000,000

Adjustments for changes in net monetary

position during the year:
Less: Increase in cash and receivables
from sales
Add: decrease in monetary assets or
increase in monetary liabilities
Purchases
Other Expenses
Income Taxes
Dividends declared

(3,020,000)

40.20

(121,404,000
)

1,920,000
655,000
82,000

40.20
40.20
40.20
40.10

77,184,000
26,331,000
3,296,400

300,000

12,030,000

Net monetary liability position translated

using rate in effect at date of each
transaction
Less: 12/31 Exposed net monetary
liability position
Remeasurement gain (loss)

25,437,400
637,000

40.25

25,639,250

BACK

Schedule: Translation of Cost of

goods Sold
Accounts
Beg inventory (assumed)

($)
760,000 H

40.00

40.20

Purchases (assumed)
Total

Remeasureme
nt exchange
Pesos
Rate
30,400,000

1,920,000

77,184,000

2,680,000

107,584,000

Less: Ending Inventory

40.22

830,000

33,382,600

1,850,00
0

74,201,400

Cost Of Goods Sold

bbbb

Balance sheet
Cash

930,000

Accounts Receivable

608,000

Inventory (FIFO)

830,000

Land

500,000

Buildings (net)

650,000

Equipment (net)

430,000

Total

3,948,000

Accounts Payable
Short-term notes payable
Bonds payable
Common stock, P10 par
Paid-in Capital in excess of par

40.25

40.25

24,472,000
Schedule 33,382,600

40.00

40.00

40.00

40.25

40.25

640,000

40.25

635,000

40.00

40.00

960,000
300,000

20,000,000
26,000,000
17,200,000

900,000

37,432,500

158,487,10
0

25,760,000
25,558,750
36,225,000
38,400,000
12,000,000

Translation using a Trial Balance

Approach
Current/Closing rate Method
Remeasurement/Temporal Method

Problem 1
1. Certain balance sheet accounts of a foreign subsidiary of RR company have been
stated in pesos as follows:

Stated at
Current rates

Historical rates

P 200,000

220,000

100,000

110,000

Prepaid Insurance

50,000

55,000

Goodwill

80,000

80,000

Accounts receivable, current

Accounts receivable, long term

1. This subsidiarys functional currency is a foreign currency. What

total should RRs balance sheet include for the preceding items?
ANSWER: 430,000 (current/closing rate method)
2. This subsidiarys functional currency is the peso. What total should
RRs
balance sheet include for the preceding items?
ANSWER: 440,000 (remeasurement)

Problem 2
2. LL corporation owns a foreign subsidiary with 2600,000 LCU of PPE
before accumulated depreciation on Dec. 31,20x4. Of this amount,
1700,000 LCU were acquired in 20x2 when the rate of exchange was 1.5
LCU = P1, and 900,000 LCU were acquired in 20x3 when the rate of
exchange was 1.6 LCU = P1. The rate of exchange in effect on December
31, 20x4 was 1.9 LCU = P1. the weighted average of exchange rates that
were in effect during 20x4 was 1.8 LCU = P1. Assuming that the PPE are
depreciated using the straight line method over a 10-year period with no
salvage value.
How much depreciation expense relating to the foreign subsidiarys PPE
should be charged in LLs Statement of Income for 20x4?
ANSWER: Functional currency LCU = P144,444
Functional Currency is peso = P169,583

Problem 3
A wholly owned subsidiary of NN Inc. has certain expense accounts for the
year ended December 31, 20x4 stated in local currency units as follows:
LCU
Depreciation of Equipment
(related assets were
purchase 01/01,20x2)
Provision for Uncollectible
Accounts
Rent

120,000

80,000

Peso Equivalent
value of 1 LCU
January 01, 20x2

P 0.50

December 31,20x4

0.40

Average 20x4

0.44

200,000
What peso amount should be included in NN Inc.s 20x4 consolidated income
statement to reflect these expenses?
1. Functional currency LCU?
2. Functional currency is peso?
Answers: 1. P 176,000
2. P 183,200

Problem 4

Certain balance sheet accounts in a foreign subsidiary of SS company on

Dec. 31, 20x4 have been restated in pesos as follows:
Stated at
Current rates

Historical rates

P 100,000

110,000

Accounts receivable, long term

50,000

55,000

Prepaid Insurance

25,000

30,000

Patents

40,000

45,000

Accounts receivable, current

What total should be included in SS balance sheet for Dec 31, 20x4
for the above items?
Functional currency LCU = ANS: 215,000 (current/closing rate
method)
Functional currency is pesos = ANS: 225,000 (remeasurement)