Development of the Accounting Translation in Foreign Currency Translation
Accounting practices have been berkembanga translation from time to time in response to the increasing complexity of multinational operations and changes in the international monetary system. To provide some angle historical view of the status of the existing accounting translation, The following is a brief narrative about the financial reporting initiatives in the United Union that represents the experience in other countries.
Before 1965
Accounting Research Bulletin (ARB) NO. 4 then updated with ARB NO. 43 encourages the use of non-present present method. Transaction gains or losses directly input into profit. Net transaction gains or losses during the period unselect disaling walk. As for the loss of net deferred transactions in the delay balance sheet and are used to eliminate translation loss in the future.
1965 - 1975
1965 - 1975
Chapter 12 of ARB No. 43 to allow certain exceptions for non-method is now present in certain circumstances. Inventory based on historical rates can ditranslasikaan. Long-term debt incurred for the purchase of long-term assets can be translated based on the exchange rate now. Any differences caused by the accounting presentation of the debt re-enacted as part of the cost of assets. Translate all the debt and receivables in foreign currency rates of exchange now allowed Accounting Principles Board Opinion after No. 6 issued in 1965.
1975 - 1981
1975 - 1981
FASB issued FAS 8 are controversial in 1975, changing practices in the U.S. and the practices of foreign companies that use U.S. GAAP by requiring use of the temporal method of translation. Suspension of translation gains and losses are not allowed anymore and should be recognized in earnings during the period perubaahanthe exchange rate. Reaction to FAS No. companies. 8 diverse. Some supports the basic theory used, while otherscriticized because of distortions that can arise in corporate profits reported. FAS # 8 cause results not accounting accordance with economic reality. Effect of FAS 8 yo-yo to earnings caused some concern among executives
companies are reported to be seen more volatile when compared with earnings of domestic companies and thus would push the company's stock price. multinasional.Mereka reportedly worried that corporate earnings will be more volatile when compared with profits of domestic companies and thus would push the company's stock price, .
1981- until now
companies are reported to be seen more volatile when compared with earnings of domestic companies and thus would push the company's stock price. multinasional.Mereka reportedly worried that corporate earnings will be more volatile when compared with profits of domestic companies and thus would push the company's stock price, .
1981- until now
FASB to reconsider FAS No. 8, and after many public meetings and two draft interim, issued Statement Of Financial Accounting Standards No.52 in 1981. Foreign Currency Translation 1 - (Foreign Currency Transactions) Reasons to do Translation.
Companies with significant overseas operations prepare consolidated financial statements that enable the reader to gain a holistic understanding of the operating companies, both domestically and abroad. For that to achieve this financial statements of foreign subsidiaries are denominated in foreign currencies are re-presented by the parent company's reporting currency.
The process of re-presentation of financial information from one currency to another currency is called translation. Translation is just a change of monetary units, for example, on a balance sheet presented are expressed in British pounds back into the U.S. dollar equivalent value. There is no physical exchange that occurred, and no related transactions that have occurred as it carried out the conversion (exchange of one currency to another currency physically).
Foreign Currency Transactions
The main characteristic of a particular foreign currency transactions are influenced settlement in a foreign currency. A foreign currency transaction is denominated in one currency, but the measured or recorded in other currencies. Functional currency of a company is defined as the currency of the primary economic environment in which firms operate and generate cash flow. If a foreign subsidiary operations relative stand-alone and integrated in a foreign country (which is a subsidiary that produces products for local distribution), will generally produce and spend money in local currency ( country – places of residence )
Foreign Currency Translation
Method to declare assets, liabilities, revenues, and expenses denominated in foreign currency into domestic currency. This method there are two types:
1) Methods Singles Currency
This method is used to present re-balances in foreign currency to the equivalent value in domestic currency with a
exchange rate, the current rate or closing rate, for all assets and current liabilities are generally used with a weighted average of the exact exchange rate for the period. Consolidated results reflect the perspective of the currency of each company whose results will be consolidated, and not the perspective of the parent company's single currency. Rate method assumes that all assets are now in the local currency exchange rate risk because the exchange is now (vs. historical) change the present value of all assets in the foreign currency equivalent to the parent company each time a change in exchange rates.
The exchange rate exchange rate historically and now in the process of translation:
exchange rate, the current rate or closing rate, for all assets and current liabilities are generally used with a weighted average of the exact exchange rate for the period. Consolidated results reflect the perspective of the currency of each company whose results will be consolidated, and not the perspective of the parent company's single currency. Rate method assumes that all assets are now in the local currency exchange rate risk because the exchange is now (vs. historical) change the present value of all assets in the foreign currency equivalent to the parent company each time a change in exchange rates.
The exchange rate exchange rate historically and now in the process of translation:
· Method of Non-Now-now
Current assets and current liabilities of foreign subsidiaries are translated into the reporting currency of its parent company based on the exchange now. Non-current assets and liabilities are translated based on historical rates. Items of income statement (except for depreciation and amortization) are translated at the average rate prevailing in each month of operation, or based on a weighted average over the entire reporting period. Depreciation and amortization are translated at historical rates recorded when the asset is acquired.
Current assets and current liabilities of foreign subsidiaries are translated into the reporting currency of its parent company based on the exchange now. Non-current assets and liabilities are translated based on historical rates. Items of income statement (except for depreciation and amortization) are translated at the average rate prevailing in each month of operation, or based on a weighted average over the entire reporting period. Depreciation and amortization are translated at historical rates recorded when the asset is acquired.
· Non-monetary method Monetary
This method uses the balance sheet classification scheme for determining the appropriate exchange rate translation. Monetary assets and liabilities are translated based on the exchange rate now. Items of non-monetary assets, long-term investment and stock investor, are translated using historical rates. Items of income statements are translated using the same procedure with the present method of non-
This method uses the balance sheet classification scheme for determining the appropriate exchange rate translation. Monetary assets and liabilities are translated based on the exchange rate now. Items of non-monetary assets, long-term investment and stock investor, are translated using historical rates. Items of income statements are translated using the same procedure with the present method of non-
· Methods of Temporal
In this method, currency translation is a process of re-conversion of the measurement or presentation of a certain value. This method does not change the attributes of an item being measured, but only change the unit of measurement. Translation of these balances in foreign currency re-denomination of measurement causes the outposts, but not the actual value. Measured by the amount of cash on hand at the balance sheet date. Receivables and liabilities are stated at amounts expected to be received or paid at maturity. Assets and liabilities measured at other money-related price at the time the post was acquired or incurred (historical price). Inventories are measured at prices that occurred as of the date of financial statements (the price is now), with which the rules of the lower of cost or market price (the dimension of time value of money associated with it).
In this method, currency translation is a process of re-conversion of the measurement or presentation of a certain value. This method does not change the attributes of an item being measured, but only change the unit of measurement. Translation of these balances in foreign currency re-denomination of measurement causes the outposts, but not the actual value. Measured by the amount of cash on hand at the balance sheet date. Receivables and liabilities are stated at amounts expected to be received or paid at maturity. Assets and liabilities measured at other money-related price at the time the post was acquired or incurred (historical price). Inventories are measured at prices that occurred as of the date of financial statements (the price is now), with which the rules of the lower of cost or market price (the dimension of time value of money associated with it).
One method of translation can not meet with the same translational performed under different conditions and for different purposes.
There are three different translational approaches yan acceptable:
There are three different translational approaches yan acceptable:
1. Historical method
2. Current methods of
3. Translation was not done at al
Translational object is to change the unit of measurement of the financial statements of foreign subsidiaries in accordance with accounting principles generally accepted in the parent company's home country.
Temporal principles generally maintain the accounting principles used to measure assets and liabilities initially expressed in units of currency translation asing.Tidak there is adequate if done between currencies are very unstable and very stable, because it will not produce meaningful information while using the manapun.Translasi method is not required if the financial statements issued by the independent firm actually issued for the purpose of providing information to residents of other countries residing in the level of economic development comparable to the situation and have a national currency that can accurately reflect translational dibandingkan.Kurs economic reality and existing businesses. The free market exchange rate used for spot transactions in countries where the accounts of the origin is translated into one-on-one exchange rate that accurately measure the value of the transaction now.
Some of the exchange rate, namely:
Some of the exchange rate, namely:
1. Currency dividend payment
2. Free market rate
3. Exchange rate penalty or preferences that can be used (related to exports or imports)
Preferably free market rate, with one exception: if there is a special rate control (ie when some type of funding that would have been allocated to certain transactions with foreign currency exchange rate specifically applicable), the applicable exchange rate shall be used.
Advantages and Disadvantages of Translation
Advantages and Disadvantages of Translation
1. Suspension
Changes in the value of the domestic currency equivalent of the net assets of foreign subsidiaries are not realized and no effect on the local currency cash flows generated from foreign entities. Translation adjustment should be accumulated separately as part of consolidated equity.
Changes in the value of the domestic currency equivalent of the net assets of foreign subsidiaries are not realized and no effect on the local currency cash flows generated from foreign entities. Translation adjustment should be accumulated separately as part of consolidated equity.
2. Deferral and amortization
Suspension of translation gains or losses and to amortize it over the useful adjustment items related to balance, especially as related to the debt will be deferred and amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized over the remainder of the loan as an adjustment to interest expense.
Suspension of translation gains or losses and to amortize it over the useful adjustment items related to balance, especially as related to the debt will be deferred and amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized over the remainder of the loan as an adjustment to interest expense.
3. Partial Suspension
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
4. Not Suspended
Recognize translation gains and losses in the income statement as soon as possible. However, inserting translation gains and losses in the current year's profit will introduce a random element in the profits that may result in significant fluctuations in earnings in case of exchange rate changes and the loss of translational tukar.Keuntungan value reflects an increase or decrease in equity of foreign investment in domestic currency and should be recognized.
Recognize translation gains and losses in the income statement as soon as possible. However, inserting translation gains and losses in the current year's profit will introduce a random element in the profits that may result in significant fluctuations in earnings in case of exchange rate changes and the loss of translational tukar.Keuntungan value reflects an increase or decrease in equity of foreign investment in domestic currency and should be recognized.
Distinguishing aspects of Corporate Financial Disclosure Practices
Notes to the financial statements intended to amplify or clarify items presented in the main part of the financial statements (income statement, changes in capital, balance sheet and cash flow). In most cases, all the necessary data reader, can not be presented in the financial statements themselves, therefore the report must include the essential information presented in the notes to financial statements. Notes to the financial statements may take the form of narrative, in part or in full. Notes to the financial statements are not only helpful for users who do not report such a quantitative understanding of accounting information but is also important to understand the performance and financial position.
Level of disclosure in the financial statements are the things that need to be considered by the assessment (judgment) managers. Level of disclosure that is moving towards full disclosure (full disclosure) will reduce the information asymmetry is a necessary condition (Necessary condition) to do earnings management (Trueman and Titman, 1998). Therefore the level of disclosure is negatively related to earnings management. Companies with a minimum level of disclosure likely to do earnings management and vice versa (Lobo and Zhou, 2001) in Yanivi (2003).
In the statement of financial accounting standards (SFAS) No. 1 on presentation of financial statements, paragraph 70 says:
Notes to the financial statements include narrative explanations or details of the amount shown in the balance sheet, income statement, cash flow statement and statement of changes in equity as well as additional information such as contingency obligations and commitments. Notes to the financial statements also include the information required and encouraged to be disclosed in the Statement of Financial Accounting Standards and other disclosures necessary to produce a fair presentation of financial statements.
Notes to the financial statements disclose:
Notes to the financial statements intended to amplify or clarify items presented in the main part of the financial statements (income statement, changes in capital, balance sheet and cash flow). In most cases, all the necessary data reader, can not be presented in the financial statements themselves, therefore the report must include the essential information presented in the notes to financial statements. Notes to the financial statements may take the form of narrative, in part or in full. Notes to the financial statements are not only helpful for users who do not report such a quantitative understanding of accounting information but is also important to understand the performance and financial position.
Level of disclosure in the financial statements are the things that need to be considered by the assessment (judgment) managers. Level of disclosure that is moving towards full disclosure (full disclosure) will reduce the information asymmetry is a necessary condition (Necessary condition) to do earnings management (Trueman and Titman, 1998). Therefore the level of disclosure is negatively related to earnings management. Companies with a minimum level of disclosure likely to do earnings management and vice versa (Lobo and Zhou, 2001) in Yanivi (2003).
In the statement of financial accounting standards (SFAS) No. 1 on presentation of financial statements, paragraph 70 says:
Notes to the financial statements include narrative explanations or details of the amount shown in the balance sheet, income statement, cash flow statement and statement of changes in equity as well as additional information such as contingency obligations and commitments. Notes to the financial statements also include the information required and encouraged to be disclosed in the Statement of Financial Accounting Standards and other disclosures necessary to produce a fair presentation of financial statements.
Notes to the financial statements disclose:
1. Information on the basic financial statements and accounting policies are selected and assigned to important events and transactions.
2. The information presented in GAAP but not presented in the balance sheet, income statement, cash flow statement and statement of changes in equity.
3. Additional information is not presented in the financial statements but is required in order to be fair representation
The more complete informsi disclosed in the notes to the financial statements (full disclosure) the financial statements, the reader will further understand the company's financial performance.
Rate Disclosure
In deciding what information will be reported, the usual practice is to provide sufficient information for judgments and decisions affecting the users. This principle is often referred to as full disclosure (full disclosure), recognizes that the nature and amount of information included in financial statements reflect a series of trade off assessments. This trade off between (1) the need to disclose in sufficient detail the things that will affect the decisions of users, with (2) the need to condense the presentation of information in order to be understood. In addition, preparation of financial statements must also take into account the cost of manufacture and use of financial statements (Kieso and Weygandt, 2002).
In case of information asymmetry is high, then the users of financial statements do not have enough information to know whether the financial statements, in particular earnings have been manipulated. Microstructure market theory says that one of the adverse selection problem faced by decision makers is the possibility of firm-specific information that the material not disclosed to the public (Yanivi, 2003). Capital market regulators to reduce this information asymmetry by making the minimum requirement for disclosure needs to be done by the companies listed on stock exchanges. One such regulation is the decision of the Capital Market Supervisory Board chairman KEP-06/PM/2000 number of guidelines for financial statement presentation. Greenstein and Sami (1994) in Yanivi (2003) examined and found that the obligation of the Securities Exchange Committee (SEC) regarding the disclosure of public enterprise segment in the U.S. stock market has reduced the information asymmetry is indicated by a decrease in bid-ask spread of the company.
Level of disclosure in the financial statements will help users of financial statements to understand the content and the numbers reported in financial statements. There are three levels of disclosure that is full disclosure, disclosure is reasonable, and adequate disclosure. Refers to the full disclosure of all information provided by the company, well-informed financial and nonfinancial information. Full disclosure not only include the financial statements but also includes information provided in the management letter, company prospect, and so on. Adequate disclosure is the disclosure required by applicable accounting standards. While the disclosure is reasonably adequate disclosure coupled with other information that could affect the fairness of financial statements such as contingencies, commitments and so forth.
Imhoff and Thomas (1994) in Yanivi (2003) proved that the quality rating of the analysis was positively related to conservatism in the estimation and selection of accounting methods, and a number of detailed disclosures on the reported figures. The implications of this discovery is a company that is more conservative in making estimates and choose the method of accounting (or management company with a level of income / low income smoothing) will reveal more information. If companies choose to report conservative earnings management / low earnings smoothing. Then it shows a negative relationship between income smoothing the level of disclosure.
Quality of Disclosure
Disclosure quality in corporate annual reports known by a variety of concepts. Among others, the sufficiency (adequacy) (Buzby, 1975), completeness (comprehensiveness) (Barrett, 1976), Informative (informativeness) (Alford et al., 1993), and on time (time lines) (Courtis, 1976; Whittred, 1980 ). Imhoff (1992) refers to the level of completeness as a characteristic quality of disclosure, while Singhvi and Desai (1971) refers to the completeness (completeness), accuracy (Accuracy), and reliability (reliability) as the characteristic quality of disclosure. Empirical indicators of the quality of expression in the form of disclosure index (disclosure index) which is the ratio (ratio) between the number of elements (items) information that is filled with a number of elements that might be met. The higher the number the disclosure index, the higher the quality
Distinguish between the translation and conversion of foreign currency.
DIFFERENCES BETWEEN TRANSLATION AND FOREIGN CURRENCY CONVERSION.
Translation is the process of restatement of financial statements information from one currency to another currency.
Rate Disclosure
In deciding what information will be reported, the usual practice is to provide sufficient information for judgments and decisions affecting the users. This principle is often referred to as full disclosure (full disclosure), recognizes that the nature and amount of information included in financial statements reflect a series of trade off assessments. This trade off between (1) the need to disclose in sufficient detail the things that will affect the decisions of users, with (2) the need to condense the presentation of information in order to be understood. In addition, preparation of financial statements must also take into account the cost of manufacture and use of financial statements (Kieso and Weygandt, 2002).
In case of information asymmetry is high, then the users of financial statements do not have enough information to know whether the financial statements, in particular earnings have been manipulated. Microstructure market theory says that one of the adverse selection problem faced by decision makers is the possibility of firm-specific information that the material not disclosed to the public (Yanivi, 2003). Capital market regulators to reduce this information asymmetry by making the minimum requirement for disclosure needs to be done by the companies listed on stock exchanges. One such regulation is the decision of the Capital Market Supervisory Board chairman KEP-06/PM/2000 number of guidelines for financial statement presentation. Greenstein and Sami (1994) in Yanivi (2003) examined and found that the obligation of the Securities Exchange Committee (SEC) regarding the disclosure of public enterprise segment in the U.S. stock market has reduced the information asymmetry is indicated by a decrease in bid-ask spread of the company.
Level of disclosure in the financial statements will help users of financial statements to understand the content and the numbers reported in financial statements. There are three levels of disclosure that is full disclosure, disclosure is reasonable, and adequate disclosure. Refers to the full disclosure of all information provided by the company, well-informed financial and nonfinancial information. Full disclosure not only include the financial statements but also includes information provided in the management letter, company prospect, and so on. Adequate disclosure is the disclosure required by applicable accounting standards. While the disclosure is reasonably adequate disclosure coupled with other information that could affect the fairness of financial statements such as contingencies, commitments and so forth.
Imhoff and Thomas (1994) in Yanivi (2003) proved that the quality rating of the analysis was positively related to conservatism in the estimation and selection of accounting methods, and a number of detailed disclosures on the reported figures. The implications of this discovery is a company that is more conservative in making estimates and choose the method of accounting (or management company with a level of income / low income smoothing) will reveal more information. If companies choose to report conservative earnings management / low earnings smoothing. Then it shows a negative relationship between income smoothing the level of disclosure.
Quality of Disclosure
Disclosure quality in corporate annual reports known by a variety of concepts. Among others, the sufficiency (adequacy) (Buzby, 1975), completeness (comprehensiveness) (Barrett, 1976), Informative (informativeness) (Alford et al., 1993), and on time (time lines) (Courtis, 1976; Whittred, 1980 ). Imhoff (1992) refers to the level of completeness as a characteristic quality of disclosure, while Singhvi and Desai (1971) refers to the completeness (completeness), accuracy (Accuracy), and reliability (reliability) as the characteristic quality of disclosure. Empirical indicators of the quality of expression in the form of disclosure index (disclosure index) which is the ratio (ratio) between the number of elements (items) information that is filled with a number of elements that might be met. The higher the number the disclosure index, the higher the quality
Distinguish between the translation and conversion of foreign currency.
DIFFERENCES BETWEEN TRANSLATION AND FOREIGN CURRENCY CONVERSION.
Translation is the process of restatement of financial statements information from one currency to another currency.
· The issue of exchange rate combined with a variety of translation methods that can be used and the treatment of "Profit / Loss" the translation of different makes comparison of financial statements results from one company to another or the same firm in different periods be difficult.
· Reasons translational
· Companies with overseas operations is the Company with extensive operations, can not prepare consolidated financial statements if their accounts and the accounts of subsidiaries are not disclosed in the single currency.
· The scale of international investment activity that extends the current increases the need to deliver information to readers in other countries who make significant consolidated financial statements that enable the reader to gain a holistic understanding of the operating companies, both domestic and foreign
· Reasons translational
Another reason:
· Take note of the foreign exchange transactions
· Reporting the activities of international branches and subsidiaries
· Reporting the results of independent operations overseas
· Terminologi
CONVERSION
· Translation is not equal to the Conversion.
· Conversion: physical exchange takes place between currencies
· Translation only change in monetary units.
· There is no physical exchange that occurred.
· There are no related transactions that occur, like when done conversion.
· The value of domestic equivalent of foreign currency obtained by multiplying the balance in foreign currency with the direct exchange rate quota.
· Terminolog
SPOT market
· The agreement to exchange a certain amount of a currency with another currency to be delivered in 2 days.
· The exchange rate is expressed in two ways:
- A direct quotation ($ 1 = Rp 9,000)
- Indirect quotation (Rp1 = 0.0001111111111 USD)
- A direct quotation ($ 1 = Rp 9,000)
- Indirect quotation (Rp1 = 0.0001111111111 USD)
FORWARD market
· The agreement to exchange a certain amount of a currency with another currency in the foreseeable future
· Terminology
FORWARD market
· Bid quote: the amount paid dealer (dealer) to a foreign currency
· Ask quote: foreign exchange dealers are required to sell a foreign currenc
SWAP transactions
· The transaction when buying spot and selling forward or spot sales and forward purchases of foreign currencies occurred simultaneously.
· Terminologi
SPREAP
· Income (profit) obtained from the difference in purchase price (bid price) the price (asking price).
Functional Currency
· Exchange of a company in conducting its operations abroad, the country where the currency is usually the company's operations are concerned.
· Currency Translation Methods UangAsing
· Method of Single Currency (Single Rate)
· The method of multiple exchange rates (Multiple Rate)
* Methods now - non-present (current-non current)
* Monetary method - non-monetary
* Method of temporal
* Methods now - non-present (current-non current)
* Monetary method - non-monetary
* Method of temporal
· Currency Translation Methods UangAsing
· Method of Single Currency (Single Rate)
· Example: U.S. MNC affiliate companies overseas to purchase land in the early period of the price of VA 1,000,000.
· Historical Currency: VA 1 = $ 1, then the historical price: $ 1,000,000
· Land prices rise so VA 1,500,000, and the exchange rate drops to $ 1 = 1.4 VA, so foreign assets to $ 714,286, meaning LOSS 285.714.
· Added value of the land market to be $ 1,071,285 (1.5 million VA: VA 1.4).
· Currency Translation Methods UangAsing
· The method of multiple exchange rates (Multiple Rate)
* Methods now - non-present (current-non current)
- Current assets and current liabilities of overseas subsidiaries are translated into the reporting currency exchange rate applicable to the parent company.
- Assets and liabilities are translated NON smoothly with historical rates.
* Methods now - non-present (current-non current)
- Current assets and current liabilities of overseas subsidiaries are translated into the reporting currency exchange rate applicable to the parent company.
- Assets and liabilities are translated NON smoothly with historical rates.
· Currency Translation Methods UangAsing
· The method of multiple exchange rates (Multiple Rate)
* Monetary method - non-monetary
- Assets and liabilities (cash, receivables and debt) are translated using the exchange rate prevailing
- NON monetary element (fixed assets, investments and inventory jk.pjg, translated using historical rates)
* Monetary method - non-monetary
- Assets and liabilities (cash, receivables and debt) are translated using the exchange rate prevailing
- NON monetary element (fixed assets, investments and inventory jk.pjg, translated using historical rates)
· Currency Translation Methods UangAsing
· The method of multiple exchange rates (Multiple Rate)
* Method of temporal
- Money, accounts receivable and debt are measured on the number promises should be translated using exchange rates prevailing at balance sheet date.
- Elements of non-monetary are translated at the exchange rate basis in accordance with the original measurements.
* Method of temporal
- Money, accounts receivable and debt are measured on the number promises should be translated using exchange rates prevailing at balance sheet date.
- Elements of non-monetary are translated at the exchange rate basis in accordance with the original measurements.
· The effect on the translation of financial statements
ALTERNATIVE EXCHANGE
1. Present exchange rate (current) is the exchange rate at the date of the financial statements.
2. Historical exchange rate is the exchange rate at the time an asset is denominated in foreign currency was first acquired, or when a foreign currency liabilities in the first place.
3. Average rate (average) is the simple average of the exchange rate now and historically.
- Effect of use of the exchange rate on the financial statements
- Effect of use of the exchange rate on the financial statements
1. The use of the exchange rate to protect the historical financial statements of profits and foreign currency translation kerungian
2. The use of the exchange rate now lead to a gain or loss on translation
· foreign currency transactions
· foreign currency transactions occur when a company buys or sells goods to the payments made in a foreign currency or when companies borrow or lend in foreign currencies.
· A foreign currency transactions can be denominated in one currency, but the measured or recorded in other currencies
· foreign currency transactions
Gain / loss transactions: the difference between the rate of exchange on the date of recording of transactions and the exchange rate at the date of payment of x amount payable in foreign currencies.
Example:
Gain / loss transactions: the difference between the rate of exchange on the date of recording of transactions and the exchange rate at the date of payment of x amount payable in foreign currencies.
Example:
· Importers of Indonesia to buy goods from U.S. companies worth $ 1,000,000 when the exchange rate 1 USD = Rp 9,500.
· Company Indonesia pay the debt within 30 days when the exchange rate $ 1 = Rp 9600, then there is a loss transaction Rp 100,000 (1,000,000 x (Rp9.600 - Rp9.500))
To record the transaction loss, can use two approaches: one transaction and two transactions
source:lana.staff.gunadarma.ac.id
Understanding the terms in the translation of foreign currency.
In terms of foreign currency translation
source:lana.staff.gunadarma.ac.id
Understanding the terms in the translation of foreign currency.
In terms of foreign currency translation
1. Conversion, an exchange of one currency into another currency.
2. Exchange rate now, the exchange rate prevailing on the date of the relevant financial laporang.
3. Net asset position at risk, the excess assets are measured or denominated in foreign currency and in translasikan at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.
4. Exchange forward contracts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.
5. Functional currency, is the main currency used by a company in the conduct of business activities. Usually such currency is the currency of the State where the company is located.
6. Historical exchange rate, the exchange value of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.
7. Reporting currency, the currency used in preparing the company financial statements.
8. Spot exchange rate, the exchange rate for currency exchange in the time immediately.
9. Translation adjustments, the adjustments arising from the translation of financial statements of a company's functional currency into the reporting currency.
Glossary of foreign currency translation, adapted from GAAP (SFAS) No.52, 1981.
1. Attributes, quantitative characteristics of an item being measured for accounting purposes. Example, historical cost and replacement cost which is an attribute of an asset.
2. Conversion, pertukatan a currency into another currency.
3. Present exchange rate, exchange rate prevailing on the date of the relevant financial statements.
4. Discount, while the subsequent exchange rate lower than current levels.
5. Net asset position at risk, as measured in excess of assets or denominated in foreign currencies and translated at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.
6. Foreign currency, a currency other than the currency used by a State, a currency other than the reporting currency used by the company.
7. Financial statements in foreign currencies, the financial statements using foreign currency as the unit of measurement.
8. Foreign currency transactions, the transaction (ie sale or purchase of goods or services, or debt loans or accounts receivable) under the conditions stated in currencies other than the functional currency of the company.
9. Foreign currency translation, the process to declare the amounts denominated or measured in one currency into another currency using the exchange rate between two currencies.
10. Foreign operation, an operation that produces financial statements that (1) combined or consolidated or accounted for under the equity method in reporting the company's financial statements and (2) arranged in foreign currencies other than the reporting currency of the reporting enterprise.
11. Forward exchange contacts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.
12. Functional currency, the currency used by suatau yanga major companies in the course of business, and in generating or using cash.
13. Historical exchange rate, exchange rate of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.
14. Local currency, the currency of a State that is used; the reporting currency used by a domestic or foreign operations.
15. Items of monetary policy, the obligation to pay or the right to receive a unit of currency in a fixed value in the future.
16. Reporting currency, the currency used in preparing the company financial statements.
17. Completion date, the date when the debt is paid by an uncollectible receivables.
18. Spot exchange rate, exchange rate for currency exchange in the time immediately.
19. Date of the transaction, the date when a transaction is recorded in the accounting records of the reporting company.
20. Translation adjustments, adjustments arising from the translation of financial statements of a company's functional currency into the reporting currency.
21. Unit of measurement, the currency used to measure the assets, liabilities, revenues and expenses.
Knowing the differences advantages and disadvantages of foreign currency translation.
Differences in gains and losses of foreign currency translation
If the point of view of local currency to be used (local companies viewpoint), the entry of the translation adjustment in current earnings do not need to be done. Enter translation gains and losses in earnings will distort the real financial relationships and can mislead the users of such information. Translation gains or losses should be treated from the standpoint of local currency as an adjustment to equity owners.
If the parent company's reporting currency is the unit of measurement of the financial statements are translated (the parent company's point of view), it is advisable to recognize gain or loss on translation of profit as soon as possible. Point of view of the parent company saw overseas subsidiaries as an extension of its parent company. Translation gains and losses reflect the increase or decrease in equity of foreign investment in domestic currency and should be recognized.
Calculate gains and losses of foreign currency translation.
Advantages and disadvantages of foreign currency translation.
Accounting treatments led to international adjustments are as diverse as translation procedures behind them. Therefore, solutions that make sense to the problem of how to treat the "profit or loss" of this translation is needed.
Approaches for accounting for translational adjustment of the approach initiated deferral (delay) to an approach that does not require a delay at all, with treatments of hybrid between the two.
Major deferal.Memasukkan translation adjustments in the profit goes to the general public was opposed on the grounds that the adjustments are just a product of the process of re-presentation. Namely, the changes in the domestic currency equivalent of the net assets of overseas subsidiaries 'unrealized', has no effect on the local currency cash flows generated by overseas entities that may be re-invested or paid back to the parent company. Incorporate such adjustments in current earnings, thus, be misleading. In these situations, must be accumulated translation adjustments separately as part of consolidated equity.
Even so, the deferral approach, possibly contested on the grounds that the exchange rate does not return to its original state by itself. Even if that happens, the adjustment-penyesuaiati deferral or the transaction will be based on the predictions of the exchange rate, the efforts of the most difficult in practice. Situations may arise where the operating results have misstated because of forecasting errors. For some, delay or loss of translational advantage over the behavior of exchange rate changes, ie, exchange rate changes historical facts and user-pemalcai keuanganakan report served well if the effects of exchange rate fluctuations are recorded when these effects arise. According to FAS No. 8 (paragraph 199), "Currency is always fluctuating; accounting should not give the impression that the exchange rate is stable".
Deferral and amortization. Some observers like the delays and gains and losses mengamortisasikan translation adjustments during the age of balance sheet items are concerned. Mark against the dollar appreciation between the date of the consolidation of translational yield losses. Based on the assumption that the cost of the asset including the sacrifices necessary to reduce and remove the associated liabilities, losses will be treated as a translation of part of the cost of the relevant asset and amortized into expense over the asset Such age.
Differences in gains and losses of foreign currency translation
If the point of view of local currency to be used (local companies viewpoint), the entry of the translation adjustment in current earnings do not need to be done. Enter translation gains and losses in earnings will distort the real financial relationships and can mislead the users of such information. Translation gains or losses should be treated from the standpoint of local currency as an adjustment to equity owners.
If the parent company's reporting currency is the unit of measurement of the financial statements are translated (the parent company's point of view), it is advisable to recognize gain or loss on translation of profit as soon as possible. Point of view of the parent company saw overseas subsidiaries as an extension of its parent company. Translation gains and losses reflect the increase or decrease in equity of foreign investment in domestic currency and should be recognized.
Calculate gains and losses of foreign currency translation.
Advantages and disadvantages of foreign currency translation.
Accounting treatments led to international adjustments are as diverse as translation procedures behind them. Therefore, solutions that make sense to the problem of how to treat the "profit or loss" of this translation is needed.
Approaches for accounting for translational adjustment of the approach initiated deferral (delay) to an approach that does not require a delay at all, with treatments of hybrid between the two.
Major deferal.Memasukkan translation adjustments in the profit goes to the general public was opposed on the grounds that the adjustments are just a product of the process of re-presentation. Namely, the changes in the domestic currency equivalent of the net assets of overseas subsidiaries 'unrealized', has no effect on the local currency cash flows generated by overseas entities that may be re-invested or paid back to the parent company. Incorporate such adjustments in current earnings, thus, be misleading. In these situations, must be accumulated translation adjustments separately as part of consolidated equity.
Even so, the deferral approach, possibly contested on the grounds that the exchange rate does not return to its original state by itself. Even if that happens, the adjustment-penyesuaiati deferral or the transaction will be based on the predictions of the exchange rate, the efforts of the most difficult in practice. Situations may arise where the operating results have misstated because of forecasting errors. For some, delay or loss of translational advantage over the behavior of exchange rate changes, ie, exchange rate changes historical facts and user-pemalcai keuanganakan report served well if the effects of exchange rate fluctuations are recorded when these effects arise. According to FAS No. 8 (paragraph 199), "Currency is always fluctuating; accounting should not give the impression that the exchange rate is stable".
Deferral and amortization. Some observers like the delays and gains and losses mengamortisasikan translation adjustments during the age of balance sheet items are concerned. Mark against the dollar appreciation between the date of the consolidation of translational yield losses. Based on the assumption that the cost of the asset including the sacrifices necessary to reduce and remove the associated liabilities, losses will be treated as a translation of part of the cost of the relevant asset and amortized into expense over the asset Such age.
No deferral. The third choice in accounting for translation gains and losses is to recognize the loss or gain in the income statement immediately. Delays of any kind is considered false and misleading. In addition, the criteria for a delay was considered impossible to implement and internally inconsistent. Thus, the traditional approach is to recognize losses immediately but only recognizes gains these gains have been realized so far. Although conservative, delays translational advantage solely because of the advantages "reject" that exchange rate changes have occurred.
Enter translation gains and losses in current earnings, unfortunately, means involving random elements in the profits that could result in significant earnings volatility every time the exchange rate change. In addition, include gains and losses "on paper" similar to the reported earnings to mislead readers of financial statements, because the correlation, this adjustment does not always provide information that matches the expected economic impact of exchange rate changes on cash flows of the company.
Sources: ine kriestianti
Advantages and disadvantages of foreign currency translation
Sources: ine kriestianti
Advantages and disadvantages of foreign currency translation
1. Suspension
Changes in the value of domestic currency equivalent of the net assets of foreign subsidiaries are not realized and no effect on the local currency cash flows generated from foreign entities. Translation adjustment should be accumulated separately as part of consolidated equity.
Changes in the value of domestic currency equivalent of the net assets of foreign subsidiaries are not realized and no effect on the local currency cash flows generated from foreign entities. Translation adjustment should be accumulated separately as part of consolidated equity.
2. Suspension and Amortization
Suspension of translation gains or losses and to amortize it over the useful adjustment items related to the balance sheet, primarily related to debt ditangguha = kandan will be amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized during the remainder of the loan as an adjustment to interest expense.
Suspension of translation gains or losses and to amortize it over the useful adjustment items related to the balance sheet, primarily related to debt ditangguha = kandan will be amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized during the remainder of the loan as an adjustment to interest expense.
3. Partial Suspension
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
4. Not suspended
Recognize translation gains and losses in the income statement as soon as possible. However, inserting translation gains and losses in the current year's profit will introduce a random element in the profits that may result in significant fluctuations in earnings in case of exchange rate changes.
Translation gains and losses reflect the increase or decrease in equity investments in domestic currency and should be recognized.
Recognize translation gains and losses in the income statement as soon as possible. However, inserting translation gains and losses in the current year's profit will introduce a random element in the profits that may result in significant fluctuations in earnings in case of exchange rate changes.
Translation gains and losses reflect the increase or decrease in equity investments in domestic currency and should be recognized.
Understanding the effect of using various methods of foreign currency translation of financial statements.
Effect of foreign currency translation method to the Financial Statements
Although most of the technical issues in accounting tends to resolve itself over time, foreign currency translation terrnyata is an exception. That this trend will continue to be supported by such developments as the collapse of the dominance of the dollar, the currency rate movements are approved by the government, and the globalization of world capital markets, which have increased the importance of reporting and financial disclosure. Such developments have profoundly increased interest ¬ executive-financial executives, accountants, and financial community on the importance and economic consequences of foreign currency translation. Let us look at the nature and development of international accounting puzzle this puzzle.
Effect of foreign currency translation method to the Financial Statements
Although most of the technical issues in accounting tends to resolve itself over time, foreign currency translation terrnyata is an exception. That this trend will continue to be supported by such developments as the collapse of the dominance of the dollar, the currency rate movements are approved by the government, and the globalization of world capital markets, which have increased the importance of reporting and financial disclosure. Such developments have profoundly increased interest ¬ executive-financial executives, accountants, and financial community on the importance and economic consequences of foreign currency translation. Let us look at the nature and development of international accounting puzzle this puzzle.
1. Single Rate Method
Based on this translational approach, the financial statements of foreign operations, which are considered by the parent company as an autonomous entity, has the reporting of their own domicile. This is a local accounting environment where foreign affiliates are mentraksaksikan his business affairs. To maintain the "flavor" of the local currency reports, a way must be found so that translation can be implemented with minimal distortion. The best way is the use of the method of exchange rate policies.
Since all financial reports of foreign exchange is actually multiplied by a konstansta, this translation method to maintain its financial results and the original relation (eg financial ratios) in the consolidated statements of individual entities that are consolidated. Only the form of overseas estimates, not the essence, the change in the method of exchange rate policies.
Although interesting and conceptually simple, the method of exchange rate policies were blamed by some people because it undermines the basic purpose of the consolidated financial statements, that is because it presents, for the benefit of shareholders of the parent company, operating results and financial position of the parent company and firms from the perspective of children the single currency. maintain the parent company's reporting currency as the unit of measurement. In the prevailing exchange rate method, the results will reflect the consolidation of perspekfif-exchange perspective of each country where companies are children. For example, if an asset dip = roleh an overseas subsidiary company for when the rate was 1.000 VA VA 1 = $ 1, then from the perspective of historical cost dollars is $ 1,000; from the perspective of local currency is also $ 1000. If the exchange rate changed to VA 5 = $ 1, the historical cost of those assets from the perspective of the dollar (translas' historical cost) remains $ 1,000. If the local currency will be retained as the unit of measurement, will be expressed nifai assets of $ 200 (exchange rate translation effect).
Rate method applies also to blame because it assumes that all assets are influenced by local-currency exchange rate risk (ie, assuming that the fluctuations in the domestic currency equivalent, which is caused by fluctuations translational running, an indicator of changes in the intrinsic value of those assets). Hat is rarely true because the value of inventory and fixed assets in foreign countries are generally supported by local inflation.
Based on this translational approach, the financial statements of foreign operations, which are considered by the parent company as an autonomous entity, has the reporting of their own domicile. This is a local accounting environment where foreign affiliates are mentraksaksikan his business affairs. To maintain the "flavor" of the local currency reports, a way must be found so that translation can be implemented with minimal distortion. The best way is the use of the method of exchange rate policies.
Since all financial reports of foreign exchange is actually multiplied by a konstansta, this translation method to maintain its financial results and the original relation (eg financial ratios) in the consolidated statements of individual entities that are consolidated. Only the form of overseas estimates, not the essence, the change in the method of exchange rate policies.
Although interesting and conceptually simple, the method of exchange rate policies were blamed by some people because it undermines the basic purpose of the consolidated financial statements, that is because it presents, for the benefit of shareholders of the parent company, operating results and financial position of the parent company and firms from the perspective of children the single currency. maintain the parent company's reporting currency as the unit of measurement. In the prevailing exchange rate method, the results will reflect the consolidation of perspekfif-exchange perspective of each country where companies are children. For example, if an asset dip = roleh an overseas subsidiary company for when the rate was 1.000 VA VA 1 = $ 1, then from the perspective of historical cost dollars is $ 1,000; from the perspective of local currency is also $ 1000. If the exchange rate changed to VA 5 = $ 1, the historical cost of those assets from the perspective of the dollar (translas' historical cost) remains $ 1,000. If the local currency will be retained as the unit of measurement, will be expressed nifai assets of $ 200 (exchange rate translation effect).
Rate method applies also to blame because it assumes that all assets are influenced by local-currency exchange rate risk (ie, assuming that the fluctuations in the domestic currency equivalent, which is caused by fluctuations translational running, an indicator of changes in the intrinsic value of those assets). Hat is rarely true because the value of inventory and fixed assets in foreign countries are generally supported by local inflation.
2. Multiple Rate Methods
Methods of combining multiple exchange rate exchange rate historically runs and in the process of translation. 3 Such methods are discussed below.
Force-historical method. Based on the true-historical approach, which is popular in the U.S. and other places before the year 1976, current assets and current liabilities of a subsidiary abroad are translated into the reporting currency using the exchange rate of its parent company applies. Assets and liabilities are non-smooth translated with historical rates. Items of income statement, except for depreciation and amortization, are translated at the exchange rate on average each month of operation or on the basis of the weighted average of the entire period to be reported. Depreciation and amortization are translated using historical exchange rates prevailing at the time of the relevant asset is obtained.
This methodology is, unfortunately, has some drawbacks. For example, this method is less choose a conceptual justification. Existing definitions of assets and liabilities and non-current classification does not explain why such a manner which will determine the exchange rate used in the process transiasi.
Monetary-nonmonetary method. As with any true-historical method, the method moniter using pattern-classification of non-monetary balance sheet to determine the appropriate exchange rate translation.
Due to monetary items in cash settled; usage rate applicable to translate the items of foreign exchange domestic currency equivalent yield that reflects the realizable value or value of the solution.
Temporal method according to the temporal approach, translational currency conversion is a process of measurement (ie, repeated presentation of a particular value). Therefore, this method can not be used to change the attributes of an item that is being measured; this method can only change the unit of measurement. Balance of foreign currency translation, for example, just change the (restate) the denomination of inventory. not the actual assessment. In U.S. GAAP, assets are measured based on jumiah cash on hand at the balance sheet date. Receivables and payables expressed in a number expected to be received or paid at maturity. Liabilities and other assets are measured at the prevailing price when the item is acquired or item ¬ occurs (historical price). Even so, some of which are measured by the prices prevailing at the date of financial statements (the price goes), such as inventory under the rules of cost or market. In short, there is a dimension of time associated with the values of this money.
By Lorensen, the best way to maintain accounting bases are used to measure these items is to translate the foreign currency amount of foreign currency at the exchange rate prevailing on the date of the measurement of foreign currency takes place. Temporal principle thus stated that
cash, receivables, and payables are measured at the promised amount should be translated using the exchange rates prevailing at balance sheet date. Assets and liabilities are measured at the price of money should be translated using the exchange rates prevailing on the date with respect to the price of money.
Methods of combining multiple exchange rate exchange rate historically runs and in the process of translation. 3 Such methods are discussed below.
Force-historical method. Based on the true-historical approach, which is popular in the U.S. and other places before the year 1976, current assets and current liabilities of a subsidiary abroad are translated into the reporting currency using the exchange rate of its parent company applies. Assets and liabilities are non-smooth translated with historical rates. Items of income statement, except for depreciation and amortization, are translated at the exchange rate on average each month of operation or on the basis of the weighted average of the entire period to be reported. Depreciation and amortization are translated using historical exchange rates prevailing at the time of the relevant asset is obtained.
This methodology is, unfortunately, has some drawbacks. For example, this method is less choose a conceptual justification. Existing definitions of assets and liabilities and non-current classification does not explain why such a manner which will determine the exchange rate used in the process transiasi.
Monetary-nonmonetary method. As with any true-historical method, the method moniter using pattern-classification of non-monetary balance sheet to determine the appropriate exchange rate translation.
Due to monetary items in cash settled; usage rate applicable to translate the items of foreign exchange domestic currency equivalent yield that reflects the realizable value or value of the solution.
Temporal method according to the temporal approach, translational currency conversion is a process of measurement (ie, repeated presentation of a particular value). Therefore, this method can not be used to change the attributes of an item that is being measured; this method can only change the unit of measurement. Balance of foreign currency translation, for example, just change the (restate) the denomination of inventory. not the actual assessment. In U.S. GAAP, assets are measured based on jumiah cash on hand at the balance sheet date. Receivables and payables expressed in a number expected to be received or paid at maturity. Liabilities and other assets are measured at the prevailing price when the item is acquired or item ¬ occurs (historical price). Even so, some of which are measured by the prices prevailing at the date of financial statements (the price goes), such as inventory under the rules of cost or market. In short, there is a dimension of time associated with the values of this money.
By Lorensen, the best way to maintain accounting bases are used to measure these items is to translate the foreign currency amount of foreign currency at the exchange rate prevailing on the date of the measurement of foreign currency takes place. Temporal principle thus stated that
cash, receivables, and payables are measured at the promised amount should be translated using the exchange rates prevailing at balance sheet date. Assets and liabilities are measured at the price of money should be translated using the exchange rates prevailing on the date with respect to the price of money.
Translation methods can be classified into two types of methods that use a single exchange rate for the present re-translation of foreign currency balances to the equivalent value in domestic currency or a method that uses a variety of rates.
1. Methods Single Currency
This method has long been popular in Europe, applying the exchange rate, the current exchange rate and the closing exchange rate, for all assets and liabilities lancer. Revenues and expenses denominated in foreign currencies are generally translated using the exchange rate prevailing at the time the posts are recognized. However, to facilitate these items are generally translated using the weighted average exchange rates are appropriate for the period. The financial statements of a foreign operation has its own reporting domicile, local currency environment in which the foreign affiliate companies do business. An asset or liability denominated in foreign currency is said to face foreign exchange risk if the equivalent in the currency used to translate the asset or liability.
This method has long been popular in Europe, applying the exchange rate, the current exchange rate and the closing exchange rate, for all assets and liabilities lancer. Revenues and expenses denominated in foreign currencies are generally translated using the exchange rate prevailing at the time the posts are recognized. However, to facilitate these items are generally translated using the weighted average exchange rates are appropriate for the period. The financial statements of a foreign operation has its own reporting domicile, local currency environment in which the foreign affiliate companies do business. An asset or liability denominated in foreign currency is said to face foreign exchange risk if the equivalent in the currency used to translate the asset or liability.
2. Multiple methods of exchange rate
The method combines Multiple Currency exchange rate exchange rate historically and now in the process of translation
The method combines Multiple Currency exchange rate exchange rate historically and now in the process of translation
3. Now the method-Nonkini
Based on the Method of Non-Now-Now, lancer current assets and liabilities of foreign subsidiaries are translated into the reporting currency of its parent company based on the exchange now. Assets and liabilities are translated lancer historical rates of exchange. Items of income statement (except for depreciation and amortization) are translated based on the average rate prevailing in each month of operation, or based on a weighted average over the entire reporting period. Depreciation and amortization are translated based on the historical exchange rate recorded saaat assets acquired.
However, this method does not consider the economic element. Using year-end exchange rate to translate the lancer assets implies that cash, receivables, and inventory in foreign currencies are equally at risk of exchange rate.
Based on the Method of Non-Now-Now, lancer current assets and liabilities of foreign subsidiaries are translated into the reporting currency of its parent company based on the exchange now. Assets and liabilities are translated lancer historical rates of exchange. Items of income statement (except for depreciation and amortization) are translated based on the average rate prevailing in each month of operation, or based on a weighted average over the entire reporting period. Depreciation and amortization are translated based on the historical exchange rate recorded saaat assets acquired.
However, this method does not consider the economic element. Using year-end exchange rate to translate the lancer assets implies that cash, receivables, and inventory in foreign currencies are equally at risk of exchange rate.
4. Monetary-nonmonetary method
Non-monetary method Monetary also use the balance sheet classification scheme fatherly determine the appropriate exchange rate translation. Monetary assets and liabilities are translated based on the exchange rate now. Items of non-monetary assets, long-term investment, and stock investors are translated using historical exchange rates. Items of income statements are translated using a procedure similar to that described for the concept of non-present now.
Non-monetary method Monetary also use the balance sheet classification scheme fatherly determine the appropriate exchange rate translation. Monetary assets and liabilities are translated based on the exchange rate now. Items of non-monetary assets, long-term investment, and stock investors are translated using historical exchange rates. Items of income statements are translated using a procedure similar to that described for the concept of non-present now.
5. Temporal method
By using the temporal method, tranlasi currency conversion is a process of re-measurement or presentation of a certain value. This method does not change the attributes of an item being measured, but only change the unit of measurement. Translation of these balances in foreign currency-denominated causes repeated measurements such items but not the actual assessment. Under U.S. GAAP, measured by the amount of cash on hand at the balance sheet date. Receivables and liabilities are stated at amounts expected to be received or paid at maturity.
By using the temporal method, tranlasi currency conversion is a process of re-measurement or presentation of a certain value. This method does not change the attributes of an item being measured, but only change the unit of measurement. Translation of these balances in foreign currency-denominated causes repeated measurements such items but not the actual assessment. Under U.S. GAAP, measured by the amount of cash on hand at the balance sheet date. Receivables and liabilities are stated at amounts expected to be received or paid at maturity.
Evaluating and selecting foreign currency translation method best suits the business and financial market conditions.
Evaluation and selection of foreign currency translation method
Under the temporal method, monetary items such as cash, receivables, and liabilities are translated based on the exchange now. Such items are translated at the exchange rate of monetary base that maintains in the first measurement. In particular, the value of assets in foreign currencies are reported at historical cost, are translated based on the historical exchange rate. Why is that? This is because historical cost in foreign currencies are translated at the exchange rate exchange rate historically produces historical cost in domestic currency.
These four methods discussed at one time been used in the United States and can be found even today in many countries. In general, these methods lead to the translation of foreign currency which is quite different. The first three methods (method of exchange rate now, the method now-non-date, and method-monetary non-monetary) are used in the identification of assets and liabilities which are at risk or may be protected from foreign exchange risk. Then, the translation method applied consistently by taking into account these differences.
Evaluation and selection of foreign currency translation method
Under the temporal method, monetary items such as cash, receivables, and liabilities are translated based on the exchange now. Such items are translated at the exchange rate of monetary base that maintains in the first measurement. In particular, the value of assets in foreign currencies are reported at historical cost, are translated based on the historical exchange rate. Why is that? This is because historical cost in foreign currencies are translated at the exchange rate exchange rate historically produces historical cost in domestic currency.
These four methods discussed at one time been used in the United States and can be found even today in many countries. In general, these methods lead to the translation of foreign currency which is quite different. The first three methods (method of exchange rate now, the method now-non-date, and method-monetary non-monetary) are used in the identification of assets and liabilities which are at risk or may be protected from foreign exchange risk. Then, the translation method applied consistently by taking into account these differences.
EXCHANGE RIGHT NOW
So far this term the exchange rate used in translation method refers to the historical or present exchange rate. The average rate is often used in the income statement for the posts load. Some countries use the exchange rate is different for different transactions. In this situation should be selected some existing exchange rate. Some suggested alternatives are:
1. rate of dividend payment
2. free market rate, and
3. penalty rates or preferences that can be used, such as those involved in import export activities
Evaluation and selection of foreign currency translation method.
Method of currency conversion
Known around the world at least 4 different types of currency conversion methods, namely:
Method of currency conversion
Known around the world at least 4 different types of currency conversion methods, namely:
1. Current methods / Non-current
This method is the oldest method of currency conversion methods. With this method, all assets and liabilities of the branches lancer converted in the currency of the company's country of origin at current exchange rates, the exchange rate at the balance sheet drawn up. Being assets and noncurrent liabilities (noncurrent), such as depreciation cost, converted at the historical exchange rate, the exchange rate at the time when the asset acquired or liability occurs. Therefore, branches of overseas companies which have a positive working capital valued in local currency will increase the risk of loss (translation loss) due to the devaluation of the method of current / non current. Instead of working capital turns negative when assessed in the local currency means that there are advantages (translation gain) due to revaluation of the method.
However, this method does not consider the economic element. Using year-end exchange rate to translate current assets implies that cash, receivables, and inventory in a foreign currency are both facing exchange rate risk. This is certainly not appropriate. In contrast, translation of long-term debt based on historical exchange rates shift the influence of fluctuating currency into the year of completion.
This method is the oldest method of currency conversion methods. With this method, all assets and liabilities of the branches lancer converted in the currency of the company's country of origin at current exchange rates, the exchange rate at the balance sheet drawn up. Being assets and noncurrent liabilities (noncurrent), such as depreciation cost, converted at the historical exchange rate, the exchange rate at the time when the asset acquired or liability occurs. Therefore, branches of overseas companies which have a positive working capital valued in local currency will increase the risk of loss (translation loss) due to the devaluation of the method of current / non current. Instead of working capital turns negative when assessed in the local currency means that there are advantages (translation gain) due to revaluation of the method.
However, this method does not consider the economic element. Using year-end exchange rate to translate current assets implies that cash, receivables, and inventory in a foreign currency are both facing exchange rate risk. This is certainly not appropriate. In contrast, translation of long-term debt based on historical exchange rates shift the influence of fluctuating currency into the year of completion.
2. Methods Monetary / non-monetary
Monetary assets (mainly cash, marketable securities, accounts receivable, and long-term receivables) and liabilities (especially debt and long-term debt) converted at current exchange rate. Being non-monetary items, such as the stock of goods, fixed assets and long-term investment, converted at the historical exchange rate.
The posts in the profit / loss is converted to the average rate during the period, except for the postal receipts and the costs associated with non-monetary assets and liabilities. Depreciation costs and cost of sales is converted at the rate equal to the balance sheet heading. As a result, cost of sales could have been converted to a different exchange rate with the rate used to convert sales. It should be noted that the monetary-nonmonetary method depends on the balance sheet classification scheme for determining the appropriate exchange rate translation. This can produce inaccurate results. This method will also distort the profit margin for sales compare based on price and exchange rate translation is now at a cost of sales are measured at cost and historical exchange rate translation.
Monetary assets (mainly cash, marketable securities, accounts receivable, and long-term receivables) and liabilities (especially debt and long-term debt) converted at current exchange rate. Being non-monetary items, such as the stock of goods, fixed assets and long-term investment, converted at the historical exchange rate.
The posts in the profit / loss is converted to the average rate during the period, except for the postal receipts and the costs associated with non-monetary assets and liabilities. Depreciation costs and cost of sales is converted at the rate equal to the balance sheet heading. As a result, cost of sales could have been converted to a different exchange rate with the rate used to convert sales. It should be noted that the monetary-nonmonetary method depends on the balance sheet classification scheme for determining the appropriate exchange rate translation. This can produce inaccurate results. This method will also distort the profit margin for sales compare based on price and exchange rate translation is now at a cost of sales are measured at cost and historical exchange rate translation.
3. Temporal method
By using the temporal method, currency translation is a process of re-conversion of the measurement or presentation of a certain value. The method does not change the attributes of an item being measured, malainkan just change the unit of measurement. Translation of these balances in foreign currency re-denomination of measurement causes the outposts, but not the actual assessment.
This method is a modification of the method of monetary / non monetary. The difference, in the method of monetary / non monetary, stock (inventory) is always converted to the historical exchange rate. Being the temporal method, inventory is generally converted to the historical exchange rate, but may be converted at current exchange rates when the inventory is recorded in the balance sheet with its market value. Theoretically, the temporal method evalusai more emphasis on cost (historical or market).
The posts in the profit / loss is generally converted to the average rate in the reporting period. Moderate cost of sales, installment debt, and depreciation related to the balance sheet items are converted at the exchange rate histories (rates in the past).
By using the temporal method, currency translation is a process of re-conversion of the measurement or presentation of a certain value. The method does not change the attributes of an item being measured, malainkan just change the unit of measurement. Translation of these balances in foreign currency re-denomination of measurement causes the outposts, but not the actual assessment.
This method is a modification of the method of monetary / non monetary. The difference, in the method of monetary / non monetary, stock (inventory) is always converted to the historical exchange rate. Being the temporal method, inventory is generally converted to the historical exchange rate, but may be converted at current exchange rates when the inventory is recorded in the balance sheet with its market value. Theoretically, the temporal method evalusai more emphasis on cost (historical or market).
The posts in the profit / loss is generally converted to the average rate in the reporting period. Moderate cost of sales, installment debt, and depreciation related to the balance sheet items are converted at the exchange rate histories (rates in the past).
4. Current rate method
This method is the easiest method because all of the post balance sheet and profit / loss is converted at current exchange rates. This method is recommended by the Institute of Accountants England, Scotland, and Wales, and is widely used by British companies. With this method, when assets exceed liabilities denominated in foreign currency in foreign exchange, a devalusai will result in losses. Variations of this method is to convert all assets and liabilities, except for net fixed assets are stated at current exchange rates.
Transactions in foreign currency.
Transactions in foreign currency.
The main characteristic of a particular foreign currency transactions are penyelesainnya influenced in a foreign currency. Thus, transactions in foreign currency occurs when a company buys or sells goods to the payments made in a foreign currency or when companies borrow or lend in foreign currencies.
A foreign currency transactions can be denominated in one currency, but the measured or recorded in other currencies. To understand why this is happening, petimbangkanlah first term functional currency. Functional currency of a company is defined as the currency of the primary economic environment in which firms operate and generate cash flow. If a foreign subsidiary operations relative stand-alone and integrated in a foreign country (ie sutau subsidiaries that produce products for local distribution), will generally produce and spend money in local currency (countries of residence). Thus the local currency (eg euros for children perusahaandari a U.S.company logated in Belgium ) is the functional currency.
To illustrate the difference between a transaction that is denominated in a currency, but measured in other currencies, eg, a U.S. subsidiary in Hong Kong to buy stock of merchandise from the People's Republic of China paid in renmimbi. Subsidiary's functional currency is U.S. dollars. In this case, the subsidiary will measure foreign currency transactions are denominated in renmimbi into U.S. dollars, the currency used in the record book. From the standpoint of the parent companies, subsidiaries liabilities denominated in renmimbi, but measured in U.S. dollar functional currency for the purposes of consolidation.
Understanding the relationship between the translations of foreign currency with inflation.
Foreign currency translation relationship with inflation. The use of the exchange rate is now to translate the cost of non-monetary assets are located in berinflasi environment will ultimately lead to an equivalent value in domestic currency is much lower than the initial baseline measurement. At the same time, earnings will be much larger translated with respect to load depresisasi which is also lower. The translation as it can be more easily mislead readers as to give information to the reader. Assessment of the lower dollar typically lower earnings power akutal of foreign assets which are supported by local inflation and the ratio of return on investment that affected inflation in a foreign operation may create false expectations on future profits.
FASB rejected before the inflation adjustment process of translation, because the adjustment is not inconsistent with the historical cost basis of the assessment framework used in the basic financial statements in the U.S.. As a solution FAS No. 52 requires the use of the U.S. dollar as the functional currency for those residing overseas operations with hyperinflation environment. This procedure will maintain a constant value of the dollar equivalent of foreign currency assets, because these assets will be translated according to the historical rate. The imposition of losses on fixed assets in the translation of foreign currency to equity shareholders will cause a significant effect on financial ratios. Foreign currency translation problem can not be separated
From the problem of accounting for foreign inflation.
FOREIGN CURRENCY TRANSLATION AND INFLATION
The use of the exchange rate is now to translate the cost of non-monetary assets are located in berinflasi environment will ultimately lead to an equivalent value in domestic currency is much lower than the initial baseline measurement. At the same time, earnings will be much larger translated with respect to load depresisasi which is also lower. The translation as it can be more easily mislead readers as to give information to the reader. Assessment of the lower dollar typically lower earnings power akutal of foreign assets which are supported by local inflation and the ratio of return on investment that affected inflation in a foreign operation may create false expectations on future profits.
FASB rejected before the inflation adjustment process of translation, because the adjustment is not inconsistent with the historical cost basis of the assessment framework used in the basic financial statements in the U.S.. As a solution FAS No. 52 requires the use of the U.S. dollar as the functional currency for those residing overseas operations with hyperinflation environment. This procedure will maintain a constant value of the dollar equivalent of foreign currency assets, because these assets will be translated according to the historical rate. The imposition of losses on fixed assets in the translation of foreign currency to equity shareholders will cause a significant effect on financial ratios. Foreign currency translation problem can not be separated from the problem of accounting for foreign inflation.
FOREIGN CURRENCY TRANSLATION IN OTHER COUNTRIES
Canada
Institute certified accountant in Canada (CICA), the UK Accounting Standards Board and International Accounting Standards Board all participated in drafting FAS No. 52. The main difference between the standards in Canada (CICA 1650) and FAS No. 52 regarding the long-term debt denominated in foreign currencies. Canadian translation gains and losses are deferred and amortized.
English
The main difference in the standard in the UK and the U.S. related to a stand-alone subsidiaries in countries experiencing hyperinflation. The first financial statements - all coinciding on the price level must be now and then translated using the exchange rate now.
Australia
Australia requires the revaluation of non-monetary non-current assets to subsidiaries in countries with high berinflasi prior to translation.
New Zealand
Basically the same as Australia, New Zealand also require translation method for non-monetary monetary-subsidiary holding company integrated its operations.
Japan
At this time the Japanese have changed the standard by requiring the exchange method is now in all the circumstances presented in the translation adjustment in stockholders' equity balance.
The number of companies doing international stock listing and follow IAS or IFRS is now called, has increased and the stock exchanges around the world are under increasing pressure to use IFRS instead of domestic standards for listing of shares of foreign companies. In the U.S., foreign companies are allowed to use international standards (IAS 21) and not the U.S. standard (FAS 52) in foreign currency translation issues.
At this time the Japanese have changed the standard by requiring the exchange method is now in all the circumstances presented in the translation adjustment in stockholders' equity balance.
The number of companies doing international stock listing and follow IAS or IFRS is now called, has increased and the stock exchanges around the world are under increasing pressure to use IFRS instead of domestic standards for listing of shares of foreign companies. In the U.S., foreign companies are allowed to use international standards (IAS 21) and not the U.S. standard (FAS 52) in foreign currency translation issues.
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