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Foreign currency translation issue

30 April 2009 7,950 views 5 Comments

Dear Colleagues,

I have a practical case regarding the subject for a not-for profit organization based in USA having operations in several African countries.Most of functional currencies of the field operations are their respective local currencies (Neither USD nor hyper Inflationary).Funds are advanced to these places from HQ periodically and will be converted to the functional currency for operational and regulatory reason. At the end of the year, Its field offices prepare financial statement on local currencies.The translation to reporting currency becomes difficult for those field office banks don’t have Ask price for USD, it doesn’t seem they have one,Specially those countries using African franc (XAF or XOF) Or getting bank buying rate for Euro is nothing to impossible.In this situation, what rate do you suggest to use to translate field office report (Balance sheet and Income Statement) to reporting currency i.e USD and Should the exchange rate gain or loss be a balancing figure?where do you suggest the gain or loss on exchange rate be classified & reported in the financial statement?

I would welcome your thoughts.

Best Regards

Aki 

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5 Comments »

  • eish said:

    If you look at FAS-52 (US GAAP), schedule, it defines the ways to determine the functional currency. Each company in each country has to have a functional currency. Fo rates you may use http://www.x-rates.com. It helps to gives most of currency rates on daily/ monthly basis.

    difference from orginal to functional moves to P&L and from functional to reporting into CTA and in balance sheet

    hope this helps

    regards
    Eish

  • admin (author) said:

    Message from Sunny

    Use the spot rate that prevails in that particular environment. Of course if it was not a policy that was instituted, it will be difficult to determine the spot rate at the end of the reporting period. But going forward, your institution can require that transactions be recorded in the local currency along with the spot rate (prevailing rate at the time of the transaction) for reporting purposes. That has to be the reporting requirement.

    You might want to contact the central bank of those locations to determine the spot rate and official exchange rate. This might be provided on a quarterly basis. It will also help you determine an average rate to use if you cannot determine the spot rate.

    Thanks

    Sunny

  • admin (author) said:

    Message from Antonello

    Aki

    You can translate foreign currencies to USD using an external source, preferably used by financial institutions, or otherwise Yahoo Finance has all currencies, including XAF and XOF (http://finance.yahoo.com/currency-converter?amt=1&from=USD&to=XAF).

    Your is a not-for-profit organization and IFRS do not apply to these entities. Under IFRS, the translation of assets & liabilities for consolidating subsidiaries, associates and joint ventures must be done consistently from period to period with the income and expenses translated with the average exchange rates applicable for the reporting period (e.g. average exchange rate January – March for reporting Q1 results). The difference from translating the income statement with an average exchange rate is allocated to other comprehensive income (cumulative translation adjustment) in accordance with IAS 21.

    Translation differences between intercompany assets and liabilities are off-set by gains or losses allocated to profit and loss, typically classified within finance income or cost.

    Regards

    Antonello

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  • admin (author) said:

    Message from Sanja

    Hi,

    According to IAS 21 The effects of changes in foreign exchange rates when an entity’s presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. Therefore, the results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

    a) assets and liabilities for each balance sheet presented (ie including comparatives) shall be translated at the closing rate at the date of that balance sheet;

    b)income and expenses for each income statement (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and

    c)all resulting exchange differences shall be recognised as a separate component of equity.

    These exchange differences are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations.

    For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

    As far as what rate to use is concerned and if they do not have prevailing rate posted on their billboard then most probably u will have to convert it to any other currency which is linked to USD and therefore convert it into USD or perhaps you may use this site:

    http://www.oanda.com/convert/classic

    where you can get the conversiot between XAF and XOF with USD, since you have no other available information.

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