Major accounting issues faced by international managers when operating
in foreign currencies
THE PURPOSE OF INTERNATIONAL ACCOUNTING: To provide international
managers with financial data for use in their decision making and to provide
people outside the org. (investors, governments, lenders, suppliers, and others)
with the quantitative info needed to inform their decisions. Accounting also
provides the data gov need to levy taxes.
Consolidation: process of translating subsidiary results + aggregating them into 1 financial
report.
Current rate method: An approach in foreign currency translation in which assets and
liabilities are valued at current spot rates
FUNCTIONAL CURRENCY AND TRANSLATION METHODS:
Foreign currency translation: the process of estimating the amount of money in one
currency in the denomination of another currency. The process of currency translation makes
it easier to read and analyse financial statements which would be impossible if they were to
feature more than one currency.
- If your business entity operates in other countries, you will be using different currencies in your
business operations. However, when it comes to accounting, your financial statements have to
be recorded in a single currency.
Functional Currency: is the primary currency of a business
- As companies transact in my currencies but report their financial statements in one
currency, the foreign currencies have to be translated into the functional currency.
When functional currency’s: Local Currency Parent Company Currency
Translation Method: Current Method Temporal Rates
Spot rate on date balance Spot rate for monetary assets; historic
Assets translated at:
sheet prepared cost for fixed assets
COGS + depreciation at historic rates;
Income Statements Average exchange rate for
avg. exchange rate for reporting period;
translated at: reporting period
other items at avg. rate for period
Owner’s Equity’s translated Rates in effect when stock
Rates in effect when stock issues
at: issued
Retained Earnings Rates in effect when earnings
Rates in effect when earnings posted
translated at: posted
in foreign currencies
THE PURPOSE OF INTERNATIONAL ACCOUNTING: To provide international
managers with financial data for use in their decision making and to provide
people outside the org. (investors, governments, lenders, suppliers, and others)
with the quantitative info needed to inform their decisions. Accounting also
provides the data gov need to levy taxes.
Consolidation: process of translating subsidiary results + aggregating them into 1 financial
report.
Current rate method: An approach in foreign currency translation in which assets and
liabilities are valued at current spot rates
FUNCTIONAL CURRENCY AND TRANSLATION METHODS:
Foreign currency translation: the process of estimating the amount of money in one
currency in the denomination of another currency. The process of currency translation makes
it easier to read and analyse financial statements which would be impossible if they were to
feature more than one currency.
- If your business entity operates in other countries, you will be using different currencies in your
business operations. However, when it comes to accounting, your financial statements have to
be recorded in a single currency.
Functional Currency: is the primary currency of a business
- As companies transact in my currencies but report their financial statements in one
currency, the foreign currencies have to be translated into the functional currency.
When functional currency’s: Local Currency Parent Company Currency
Translation Method: Current Method Temporal Rates
Spot rate on date balance Spot rate for monetary assets; historic
Assets translated at:
sheet prepared cost for fixed assets
COGS + depreciation at historic rates;
Income Statements Average exchange rate for
avg. exchange rate for reporting period;
translated at: reporting period
other items at avg. rate for period
Owner’s Equity’s translated Rates in effect when stock
Rates in effect when stock issues
at: issued
Retained Earnings Rates in effect when earnings
Rates in effect when earnings posted
translated at: posted
