Briefly explain the following terms associated with accounting for foreign entities:a) Functional Currency b) Translation c) Remeasurement
What will be an ideal response?
a) Functional currency is the currency of the primary economic environment in which the entity operates; normally that is the currency of the environment in which an entity primarily generates and receives cash. The functional currency is used to differentiate between two types of foreign operations, those that are self-contained and integrated into a local environment, and those that are an extension of the parent and integrated with the parent.
b) Translation is the most common method used and is applied when the recording currency is the foreign entity's functional currency. To translate the financial statements, the company will use the current rate, which is the exchange rate on the balance sheet date, to convert the recording currency balance sheet account balances into U.S. dollars. Any translation adjustment that occurs is a component of comprehensive income. Because revenues and expenses are assumed to occur uniformly over the period, revenues and expenses on the income statement are translated using the average rate for the reporting period.
c) Remeasurement is the restatement of the foreign entity's financial statements from the recording currency that the entity used into the foreign entity's functional currency. Remeasurement is required only when the functional currency is different from the currency used to maintain the books and records of the foreign entity. Monetary assets and liabilities are translated at the current rate. Non-monetary assets and liabilities, including inventories, are translated at their historical rates. The income statement items other than cost of goods sold is translated at average rates. Any resulting adjustment is taken into current period income.
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