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The first step in foreign currency accounting is identifing each currency:

While seemingly self-evident, IFRS and US GAAP do not define "foreign currency" relative to "local currency" as one might expect. Instead, they define it relative to "functional currency." In some situations, this quirk has the power to change a seemingly local currency into a foreign currency for IFRS and US GAAP purposes.

For example, assume XYZ is an e-shop listed in New York but headquartered in Amsterdam. Also assume, it sells merchandise to customers throughout Europe (or perhaps intentionally, but that would be unnecessarily complicated). Also assume, it sources this merchandise from suppliers in Germany and the Czech Republic. Also assume, it is not listed on a regulated EU market and so has no IFRS obligations. Also assume, even though could apply the SEC's foreign private issuer exception and publish IFRS financial reports denominated in EUR it has decided to apply US GAAP and publish reports denominated in USD. Also assume, to simplify its accounting it has decided to keep its statutory accounts in its statutory currency and just make adjustments when drafting its US GAAP report.

In this situation, the DKK, its nominally local currency, would actually be a foreign currency because the EUR would be its functional currency even though the DKK would be its accounting currency and the USD its reporting currency. While not impossible, such a situation certainly qualifies as bizarre.

By the way, XYZ is fortunate some of its suppliers are in Germany. If they had all been in, for example, the Czech Republic, it might have had to discuss how to determine the functional currency with its auditor, a discussion most auditors avoid engaging in off the clock.

In its Financial Reporting Manual (link) the SEC states: S-X 3-20(a)(2) requires that a U.S.-incorporated registrant will present its financial statements in U.S. dollars. In limited instances, the staff has not objected to the use of a different reporting currency. Those instances have been limited to situations where the U.S.-incorporated registrant had little or no assets and operations in the U.S., substantially all the operations were conducted in a single functional currency other than the U.S. dollar, and the reporting currency used was the same as the functional currency. The staff has also not objected when a foreign issuer who does not meet the definition of a foreign private issuer applies this approach in similar circumstances.

So, while the SEC might theoretically accept an EUR-denominated US GAAP financial report, it would not be thrilled. Similarly, as some US-based analysts have trouble dealing with currencies other than the USD, they would not be pleased either. Nor would the US capital market, which would likely give XYZ's shares a discount commensurate with the extra layer of uncertainty its accounting policy introduces.

Especially so because XYZ could opt to keep two sets of accounts: one in DKK and DK GAAP, the other in USD and US GAAP. This way, it would account for all non-DKK / non-USD balances as non-DKK / non-USD balances for DK GAAP / US GAAP purposes, avoiding the unnecessary complications (though it might have to explain why its taxable income includes forex differences when most of its receipts and disbursements are in EUR).

Local currency (LC)

As the name suggests, the local currency is the currency used locally.

While seemingly self-explanatory, US GAAP does go to the trouble of defining local currency.

ASC 830-20: Local Currency - The currency of a particular country being referred to.

However, since it does, perhaps it could have done a better job.

Such as: Local Currency - The currency used by entities domiciled in a particular jurisdiction to transact business among themselves, with residents of that jurisdiction, with visitors to that jurisdiction and with the jurisdiction's government, though exceptions may exist.

Currencies such as the euro are legal tender in multiple countries, so jurisdiction is a more accurate term.

Splitting hairs? Maybe. But accounting guidance is better when it's precise.

While the Canadian, Australian or Bermudian dollar is rarely used to transact business outside these countries, the USD is accepted worldwide, occasionally even supplanting the (official) local currency.

Similarly, the euro, renminbi or rupee are commonly used to transact business in Poland and Hungary, Cambodia and Myanmar, Nepal and Bhutan, etc.

Too wordy.

OK, how about: Local Currency - The currency in which an entity pays local taxes.

As most governments only accept tax payments in their country's official currency, this is a great indicator that a currency is, in fact, local.

Specifically, when a company does significant business in a particular country, it usually establishes a legal presence in that country. This presence may be a subsidiary (a separate legal entity such as a corporation or limited liability company) or simply a branch office (registered for taxation and governance purposes but with no separate, legal standing). Regardless of form, the official currency of the country of domicile is usually the currency in which the entity transacts business, keeps its books and pays its local taxes.

However, in Ecuador or Panama, tax payments can be made in USD. While this does not, technically, make the USD local, it does cause the above logic to break down.

Similarly, the German Finanzamt will gladly accept tax payments in Greek minted euros even if the Bundesbank balks at accepting Greek government bonds as collateral.

Better, but not perfect.

For example, Switzerland allows businesses to maintain their books and calculate their tax obligations in (for example) euros. True, the EUR must be converted to CHF to make the payment, but that is just a formality.

You're hard to please. Local Currency - The currency or currencies the law of a particular country prescribes or allows for statutory accounting and/or taxation purposes.

For example, in the European Union, it is possible to establish a subsidiary in a non-eurozone EU country to transact business in neighboring, eurozone EU countries. Usually, the euro would have all the salient characteristics of being local (above) even though it is not, formally, local.

However, some EU countries, for example Poland and Denmark, not only require tax payments in zloty and krone, but require locally domiciled legal entities to keep their books in these currencies. This makes the issue of local currency anything but a formality.

National requirements change. This page is not designed to keep track of such changes. The above reflects the situation as at 12/31/2025.

For example, to take advantage of country F's EU membership, relatively low labor costs, and otherwise benevolent regulatory environment, XYZ, a US-based contractor, established XYZ-F even though country F was not in the eurozone and practically all XYZ-F's projects were in eurozone countries. What XYZ's management failed to consider was that country F required all locally domiciled legal entities to maintain their statutory accounts (a.k.a. local GAAP) in CFC (country F's official currency). For a while, things went swimmingly, but then, all of a sudden, country F's government, err... central bank, decided to devalue the CFC to boost country F's exports to the eurozone. Oops. Since country F's accounting legislation had no concept of functional currency and its tax law made no distinction between realized and unrealized forex differences, XYZ-F's tax obligation, much to the chagrin of XYZ's management, spiked even though there was no correspondingly large change in the exchange rate between the USD (XYZ's functional currency) and EUR (XYZ-F's functional currency).

Not bad, but we're back to too wordy.

Fine. Local Currency - The currency not foreign.

Perfect

It would be logical to assume that if one currency were local, any other different currency would, necessarily, be foreign. However, US GAAP does not define foreign currency by reference to the local currency, but rather the functional currency.

ASC 830-20: Foreign Currency - A currency other than the functional currency of the entity being referred to (for example, the dollar could be a foreign currency for a foreign entity)...

This definition can, counterintuitively, turn the currency of a particular country being referred to from a local currency into a foreign currency. Omitting the reference to some country not only streamlines the logic, but adds the benefit of being fully consistent with the remainder of ASC 830's guidance, which revolves around the interaction between the foreign currency and functional, rather than local, currency.

Another way to circumnavigate these rocky, logical shoals, simply to omit a local currency definition and assume the term is self-explanatory, an approach IFRS takes.

Probably because it is self-explanatory, IFRS does not go to the same trouble.

While it mentions local currency (e.g. IAS 21.11.a or IAS 29.2), IFRS does not, like US GAAP, define it.

The most likely reason, since IAS 21's guidance revolves around the interaction between the functional and foreign currencies, a definition of local currency would be superfluous.

Foreign currency (FC)

As the name suggests, a foreign currency is a currency not used locally, in most cases.

Most often, a foreign currency is indeed a currency not used locally. However, IFRS | US GAAP defines foreign currency relative to functional currency, not local currency. Paradoxically, in some situations, this guidance has the power to turn the local currency into a foreign currency, at least as far as IFRS | US GAAP is concerned.

IAS 21.9 defines: Foreign currency is a currency other than the functional currency of the entity.

ASC 830-20 (edited) defines: Foreign Currency - A currency other than the functional currency of the entity being referred to (for example, the dollar could be a foreign currency for a foreign entity)...

Not only the definition, but all the guidance provided by IAS 21 | ASC 830 revolves around the interaction between the functional currency and a foreign currency(ies), not the local currency and a foreign currency(ies).

The functional currency is discussed in more detail below.

For example, XYZ is Swiss-domiciled contractor. Most of its projects are in neighboring, Eurozone countries. XYZ's functional currency is thus EUR and CHF, its nominally local currency, is an IFRS | US GAAP foreign currency.

As a rule of thumb, if more than half an accounting entity's receipts and disbursements come in a particular currency, that currency will be its functional currency. If the cash flow indicators are mixed, other considerations, such as financing, come into play.

A more detailed discussion of functional currency is provided below.

Whether it will also be its accounting currency (below) is another issue. Fortunately, in XYZ's case, Swiss accounting standards have a concept comparable to functional currency, so the difference is, for the most part, a formality. If XYZ had been domiciled in some other country, for example Denmark, it may not have been as lucky. Since not all national accounting statutes include a functional currency concept, they may require locally domiciled legal entities to maintain their books of record in the local currency. While IFRS | US GAAP guidance cannot be subordinated to local GAAP, local GAAP requirements can have palpable implications on both an entity's cost structure and its IFRS | US GAAP reporting (as discussed in more detail in the above section).

IAS 21.8: Foreign currency is a currency other than the functional currency of the entity.

ASC 830-20 (edited): Foreign Currency - A currency other than the functional currency of the entity being referred to (for example, the dollar could be a foreign currency for a foreign entity)...

All countries bordering Switzerland, except Liechtenstein, are in the eurozone. As a result, practically all XYZ's receipts and disbursements are denominated in euro which means the EUR is its functional currency turning the CHF into a foreign currency.

Note: while the guidance on functional currency is more involved (below), cash flow is a good rule of thumb.

Accounting currency (AC)

As the name suggests, the accounting currency is the currency in which an entity keeps its accounts.

Also known as the currency of record, IFRS and US GAAP do not see much point in an entity keeping its books in any currency but its functional currency. But, unlike some national systems, they do not preclude it.

While IFRS | US GAAP does not define an accounting currency, it does refer to the currency in which an entity keeps its records, for example in IAS 21.34 and IAS 7.25 | ASC 830-10-45-17 and ASC 830-10-55-8.

Note: the terms currency of record and accounting currency can be used interchangeably, but the latter is somewhat more common in practice.

In countries with a statutory accounting system, locally domiciled legal entities may or may not be required to keep these accounts in the local, national currency.

In contrast to common law countries such as the United States or Canada, civil law countries, such as all the EU member states (except Ireland), tend to have legislated national accounting systems mandatory for statutory reporting and taxation purposes.

Thus, while an Irish-domiciled legal entity can use IFRS (with a few adjustments) to determine its tax obligation, in Germany it will need to apply the Handelsgesetzbuch (HGB), so-called German GAAP.

While used often, a term like German GAAP is an oxymoron. The acronym GAAP stands for generally accepted accounting principles. German GAAP, much like all the other national accounting systems drafted to be consistent with the EU’s accounting directive, are neither generally accepted nor principles based. Instead, they are legislated and based on rigid rules.

How rigid? Unlike IFRS and US GAAP which focus on output, financial reporting, and so give entities latitude with respect to procedures, these national systems are rigid, dictating structure (charts of accounts) and procedures (debits and credits) an entity must use to be in compliance.

For example, like most European countries, Switzerland has an act on accounting that establishes so-called national GAAP even though it is not in the EU and thus not bound by the EU's accounting directive.

However, SCO Art. 957a.4 allows entities to keep these books in "the currency required for business operations" (a.k.a. functional currency).

True, entities must report their results and remit taxes in Swiss francs but, as the procedure is comparable to translation, this requirement does not change a company's tax liability. It merely requires the company to acquire some CHF when it comes time to pay, that is if they do not have any francs in a foreign currency account or corporate cash pool.

As noted in the above section, the functional currency concept has the power to change a local currency into a foreign currency for accounting purposes. This applies to both IFRS | US GAAP accounts and to national GAAP accounts in countries, such as Switzerland, whose accounting legislation has a functional currency concept.

Switzerland does require companies to report their results and remit taxes in CHF. This is, however, a mere formality as the translation is done the same way it would be done under IFRS | US GAAP, using the current rate method.

More importantly, as taxable income is calculated in the functional currency, exchange rate differences between that currency and the Swiss franc will not affect the amount of tax to be remitted. True, the functional currency will need to be converted to francs before it is remitted, but this simply involves selecting CHF as the payment currency in a bank transfer (or, since banks usually offer miserable exchange rates, buy the CHF on a currency market or getting it from the corporate cash pool).

Some EU countries, for example the Czech Republic, have similar rules while others, such as Denmark, require these accounts to be maintained in the local currency.

While not relevant in the IFRS | US GAAP context, some national GAAPs prescribe the currency, generally local currency, an entity must use for accounting purposes. While this will not influence how IFRS | US GAAP guidance is applied, it may influence what is reported.

IFRS | US GAAP provides self-contained guidance, not subordinated to any statutory accounting requirement. Thus, while a national GAAP may prescribe a particular accounting currency, in IFRS | US GAAP this is a policy decision the entity makes for itself.

While not an issue in the US, where companies invariably use both US GAAP and the USD for accounting and taxation purposes, the situation differs in the EU. In addition to IFRS (mandated by EC 1606/2002), EU countries also have national accounts (mandated by the accounting directive). IFRS is used for financial reporting purposes if the company’s financial instruments trade on a regulated market, while national accounts are used for statutory accounting and taxation purposes.

As IFRS guidance and statutory accounting rules are not the same, companies apply a variety of policies to cope with these requirements.

The first, optimal approach is to implement a dual reporting system supported by software that facilitates the use of multiple charts of accounts. This way, the company can apply both IFRS guidance and national rules without compromise and, most importantly, without the risk of one influencing the other.

A less optimal approach is to first set up accounts consistent with IFRS guidance and then make adjustments to produce a financial report per national guidance. This approach is advantageous because it is either explicitly or implicitly allowed by national legislation, as each country has a mechanism to allow an IFRS report to be drafted. However, it requires adjustments to determine taxable income, which can complicate tax audits. Tax auditors, who are experts in national GAAP, may not have the same level of expertise in IFRS, making it difficult to explain and justify these adjustments.

Another comparably less optimal approach is to first set up accounts consistent with national regulations and then make adjustments to draft a financial report per IFRS. The primary difficulty here is that while IFRS is principles-based and focuses on substance over form, national GAAPs tend to be legalistic, focusing on form over substance. Accountants who apply national GAAP day-to-day may find it overwhelming to make the necessary adjustments to thousands or tens of thousands of transactions in a period. This can cause significant discrepancies between IFRS guidance and the final result. Consequently, the company may need the services of an IFRS expert, typically an outside expert, who is well-versed in both IFRS and national GAAP. These experts are not particularly numerous, and their services are usually expensive.

Which approach should be used? This mostly depends on what presents the greater potential problem. If the company wants to avoid a problematic IFRS audit, it will select sub-optimal approach one. If it wants to avoid a problematic tax audit, it will select sub-optimal approach two. To avoid problems altogether, it will select the optimal approach.

Another advantage of the optimal approach, often used by US companies with numerous subsidiaries in various jurisdictions, is the concentration of US GAAP experts in a single joint service center, which can be located anywhere in the world. These experts can focus solely on US GAAP compliance. At the national level, local accountants can focus on national GAAP compliance without considering US GAAP repercussions. Additionally, relatively inexpensive data entry technicians can apply the company's policies to standard transactions and events. Assuming these policies are well designed and communicated, the joint service center receives the data it needs, allowing its experts to focus on individual, non-standard transactions or events.

Regardless of the approach, the result needs to be the same. If a financial report states it complies with IFRS or US GAAP, it must be consistent with IFRS or US GAAP and not subordinated to a national system.

However, there is one place where statutory accounting can have a significant influence on an IFRS or US GAAP report. If statutory accounting serves as the basis for taxable income, it will determine the entity's reported tax expense and its real life cash flow.

In a real-life example, ABC, a Eurozone-based contractor, established a subsidiary, ABC-CZ, in the Czech Republic to manage projects in neighboring countries. It did so to take advantage of the country's EU membership and otherwise favorable regulatory environment. Initially, it seemed like a shrewd business decision. Unfortunately, while practically all ABC-CZ's cash flows were in EUR, Czech law at the time had no functional currency concept and required ABC-CZ to maintain its statutory accounts in CZK. As these accounts also serve as the basis for determining taxable income, ABC's management was unpleasantly surprised when ABC-CZ's tax payment spiked significantly following a period of unusual exchange rate volatility. It was doubly surprised because, as ABC and ABC-CZ shared the same IFRS functional currency, no forex difference, realized or unrealized, appeared in these financial statements.

From 2024, CZ law has updated its legislation to include a "functional currency concept." Unlike IFRS | US GAAP, this is a policy decision, not a matter of fact. Also unlike IFRS | US GAAP, where the functional currency (below) primarily determines how a parent will consolidate its foreign currency subsidiary's (ies') results, in CZ law the entity's "functional currency" determines its accounting currency (in a manner similar to the Swiss requirements discussed above).

Note: CZ law now allows entities retaining the CZK as their accounting currency to make an accounting election with respect to unrealized forex differences for the purpose of determining taxable income.

Important: other countries have or may have comparable legislation. However, since it is not the aim of these pages to keep track of the legislative requirements (changes in legislative requirements) on a national by national level, readers are strongly advised to consult with a qualified local professional before making any accounting policy decisions.

Having said that, they do make entities wanting to do so jump through a few hoops:

IAS 21.34 states (edited, emphasis added): When an entity keeps its books and records in a currency other than its functional currency, at the time the entity prepares its financial statements all amounts are translated into the functional currency...

At first glance, it appears as if IFRS and US GAAP provide incompatible guidance — one requiring a translation, the other remeasurement. However, this difference is only due to semantics.

Somewhat confusingly, IAS 21 uses "translation" to denote the procedure outlined in IAS 21.23 (monetary/non-monetary method) as well in IAS 21.39 (current/non-current method).

To avoid potential confusion, ASC 830 refers to a "remeasurement" performed per ASC 830-10-45-18 as remeasurement and a "translation" performed per ASC 830-30-45-3 as a translation.

Since the guidance in IAS 21.23 is comparable to the guidance ASC 830-10-45-18, while the guidance in IAS 21.39 is comparable to ASC 830-30-45-3, the guidance provided by IFRS is compatible with the guidance provided by US GAAP.

Compatible. Not identical.

For example, IAS 21.23.a specifies that "foreign currency monetary items shall be translated using the closing rate" (remeasured). In contrast, ASC 830-10-45-18 assumes this is clear, so focuses on items measured using historical rates (not remeasured).

Additionally, while IAS 21.23.b specifies that non-monetary items (except those measured at fair value, an option US GAAP does not provide) should be measured at the rate at the date of the transaction (historical rate), ASC 830-10-45-18 a to l includes an itemized list.

While IAS 21 assumes it is clear that expenses associated with non-monetary items (such as depreciation) will be measured using the same historical rates as those non-monetary items, ASC 830-10-45-18.m goes to the trouble of specifically mentioning: cost of goods sold, depreciation of property, plant and equipment, amortization of intangible items such as patents, licenses, and amortization of deferred charges or credits (except policy acquisition costs for life insurance entities).

Nothing beats dotting the I's and crossing the T's.

Thanks, US GAAP. What would we have done without you?

ASC 830-10-45-17 states (edited, emphasis added): If an entity's books of record are not maintained in its functional currency, remeasurement into the functional currency is required.

As noted above, IFRS translation and US GAAP remeasurement are the same thing.

Another thing they have in common is that applying the guidance can be a pain.

For example, we once had a client with the local currency as its accounting currency while its functional currency was the euro, necessitating an IAS 21.23 remeasurement.

That meant picking through all the monetary items, one by one, all the non-monetary items, also one by one, and all the expenses associated with non-monetary items (such as depreciation), item by item.

While not impossible, this does take effort and time which, especially at year-end when accountants have plenty of other things to do, is short.

So, after a thorough consultation, the company decided on a different approach. They had their IT vendor add a second currency to their accounting software package (something the vendor initially claimed was impossible until the company hinted that changing vendors might do the trick).

The result? Recognition stayed the same, but measurement was done twice: once in the local currency with a conversion to EUR (for domestic revenue, expenses, and capital expenditures), and then again in EUR with a conversion to the local currency (for international revenue, expenses, and capital expenditures). Marginally more work, but spread out throughout the period.

As this procedure led to the same reporting result as if IAS 21.23 had been applied to accounts kept only in the local currency, the company’s auditor did not have a problem accepting this policy decision.

Note: Since the company’s accounts were based on local GAAP, it still had to make recognition and measurement adjustments to align local GAAP to IFRS, but at least it did not also need to deal with forex differences.

Reporting currency (RC)

As the name suggests, the reporting currency is the currency in which an entity denominates its reports.

Also known as the presentation currency, IFRS and US GAAP do not see much point in an entity denominating its reports in any currency but its functional currency. But, unlike some national systems, they do not preclude it.

IFRS 21.9 defines: Presentation currency is the currency in which the financial statements are presented.

ASC 830-20 defines: Reporting Currency - The currency in which a reporting entity prepares its financial statements.

While the term reporting currency is more commonly used, the term presentation currency is more precise. Otherwise, the two are interchangeable.

This applies to both a parent and its foreign currency subsidiaries. The difference, those subsidiaries first prepare financial reports in their functional currencies. The parent then translates these reports into its functional currency so it can produce a consolidated financial report.

Assuming the parent denominates the consolidated reports in its functional currency. If it does not, it will need to jump, as discussed below, through a few hoops.

Note: Some entities use a single, company-wide information system instead. However, the general procedure would be comparable. The only difference is that instead of translating a subsidiary's financial report into its functional currency, the parent would translate the subsidiary's foreign currency accounts.

In countries with a statutory accounting system, locally domiciled legal entities may or may not be required to not only keep these accounts but also publish financial reports denominated in the local, national currency.

Thus, while an Irish-domiciled legal entity can use IFRS (with a few adjustments) to determine its tax obligation, in Germany it will need to apply the Handelsgesetzbuch (HGB), so-called German GAAP.

However, SCO, Art. 957a.4 allows entities to keep these books in "the currency required for business operations" (a.k.a. functional currency).

More importantly, as taxable income is calculated in the functional currency, exchange rate differences between that currency and the Swiss franc will not affect the amount of tax to be remitted. True, the functional currency will need to be converted to franc before it is remitted, but this simply involves selecting CHF as the payment currency in a bank transfer (or, since banks usually offer miserable exchange rates, buy the CHF on a currency market or getting it from the corporate cash pool).

Some EU countries, for example the Czech Republic, have similar rules while others, such as Denmark, require these accounts to be maintained in the local currency.

As IFRS guidance and statutory accounting rules are not the same, companies apply a variety of policies to cope with these requirements.

Having said that, they do make entities wanting to do so jump through a few hoops:

IAS 21.38 states (edited): An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency....

Somewhat confusingly, IAS 21 uses the term "translation" to cover both conversion methods.

The first method, commonly known as monetary/non-monetary, is discussed in IAS 21.23, while the second, commonly known as current/non-current, is discussed in IAS 21.39.

In IAS 21.38, the translation being referred to is with the IAS 21.39 method. In contrast, the IAS 21.23 method would be used to translate accounts into the functional currency if an entity did not keep its books in its functional currency (above).

As the name implies, the IAS 21.23 method would also be used to translate a foreign currency bank account, receivables or payables denominated in a foreign currency, loans payable in a foreign currency, etc., at an entity that does not have any foreign currency subsidiaries.

Note: To avoid confusion, US GAAP uses the term remeasurement for the former, translation for the latter.

While not as explicit, US GAAP provides comparable guidance.

ASC 830-10-45-17 states (edited): If an entity's books of record are not maintained in its functional currency, remeasurement into the functional currency is required. That remeasurement is required before translation into the reporting currency. If a foreign entity's functional currency is the reporting currency, remeasurement into the reporting currency obviates translation...

Without explicitly stating as much, this guidance implies that an entity will, after remeasuring its books into its functional currency, translate its results into the reporting currency, assuming it is different.

Functional currency (FuncC)

As the name suggests, the functional currency is the currency in which an entity functions (seriously).

Seriously, the functional currency is what it says on the tin.

It is the currency that allows an entity to function which, in a business context, means generating cash flow.

While both could have simply said this and called it a day, IFRS and US GAAP go to considerable lengths (16 paragraphs and sub-paragraphs in the case of the former and 22 with the latter) to make sure this point gets across.

IAS 21.9 starts off promisingly by stating, "the primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash."

If it had simply ended the paragraph with "the functional currency is the currency used in that environment," it would have been fine.

But no. Instead, IAS 21 decided to devote the next three paragraphs to the various factors (summarized and edited) that need to be considered:

9.a.i - sales prices
9.a.ii - competitive forces
9.b – cash expenses (labour, material, etc.)
10.a - financing
10.b - sales receipts
11.a - autonomy of the business unit
11.b - proportion of FC transactions
11.c - effect of FC on overall cash flows
11.d - if FC cash flows can service FC debt

But, after going to all this trouble, IAS 21.12 states (edited), "when the above indicators are mixed and the functional currency is not obvious, management uses its judgment..." while IAS 21.13 reminds everyone that (edited), "an entity’s functional currency reflects the underlying transactions, events and conditions that are relevant."

Thanks IAS 21. This guidance is key because, as everyone knows, it will never occur to management to use their judgment on their own and they will certainly consider irrelevant issues unless explicitly told to ignore them.

Then, the cherry on the cupcake, IAS 21.14 discusses hyperinflationary economies because, as everyone knows, there are so many of them and they are so important they absolutely, positively deserve, not just a paragraph, but also their own, dedicated standard (IAS 29).

Jesting aside, back in 1983, when the IASC first adopted IAS 21, hyperinflation was much more of an issue than in the 2020s, when central banks have (except in marginal countries) gotten very good at managing inflation. Thus, taking this historical context into account, while the guidance does seem dated, it is perfectly understandable.

Rather than starting off with what a functional currency is like IAS 21, ASC 830-10-55-4 cuts right to the chase stating (edited): ...In those instances in which the indicators are mixed and the functional currency is not obvious, management's judgment will be required to determine the functional currency ... It is important to recognize that management's judgment is essential and paramount in this determination, provided only that it is not contradicted by the facts.

Obviously, this guidance is key because everyone knows management needs constant reminding that accounting involves judgment, especially judgment not contradicted by the facts.

Thanks, US GAAP.

Once that is out of the way, ASC 830-10-55-5 goes on to list factors that should be considered when making that judgment. They include (edited):

Cash flow indicators, for example:

Foreign currency. Cash flows...
Parent's currency. Cash flows...

Sales price indicators, for example:

Foreign currency. Sales prices...
Parent's currency. Sales prices...

Sales market indicators, for example:

the subsidiary's cash expenses (labor, materials, etc.)

Foreign currency. There is an active local sales market...
Parent's currency. The sales market is mostly in the parent's country...

Expense indicators, for example:

Foreign currency. Labor, materials, and other costs...
Parent's currency. Labor, materials, and other costs...

Financing indicators, for example:

Foreign currency. Financing is primarily denominated in foreign currency...
Parent's Currency—Financing is primarily from the parent...

Intra-entity transactions and arrangements indicators, for example:

Foreign currency. There is a low volume of intra-entity transactions...
Parent's currency. There is a high volume of intra-entity transactions...

Thanks again US GAAP. Stating the obvious always helps.

It is also nice to know that a foreign production facility could sell its products both intercompany (presumably in its parent's currency) and externally (presumably in the customer's currency) or that a bank could set up branches in countries where depositors prefer to use their local currencies.

But seriously, ASC 830-10-55-6 does provide some insight, even if it does so implicitly.

Specifically, the guidance does not state that an "entity" (a.k.a. accounting entity) must be a "legal entity." This is especially important when a US company does business internationally, with subsidiaries in countries that do specify that an accounting entity must be a legal entity.

For example, this guidance implies it would be acceptable, to combine German, Swiss and French subsidiaries into a single accounting entity for US GAAP purposes even if they must be kept separate for statutory account/taxation purposes. On the flip side, it also implies that it would not be acceptable to combine Czech, Slovak, Hungarian and Austrian subsidiaries into a single accounting entity. Implies, but does not preclude.

As the guidance does allow management to exercise judgment, it would be possible to combine Czech, Slovak, Hungarian and Austrian subsidiaries when a valid economic (or perhaps cultural) reason exists. For example, because they all sold products made in Germany (or because they were all once part of the Austro-Hungarian Empire). In such a situation, the accounting entity's currency indicators would be mixed even if the legal entities' were not. As ASC 830-10-55-4 puts it, the functional is the "currency that most faithfully portrays the economic results of the entity's operations..." This guidance gives management considerable leeway in deciding what an accounting entity is, and what functional currency it has.

Thus, for US GAAP purposes, management can be fairly creative, especially it it considers ASC 830-10-45-3, which states (edited): It is neither possible nor desirable to provide unequivocal criteria to identify the functional currency of foreign entities under all possible facts and circumstances and still fulfill the objectives of foreign currency translation....

So, once again, thanks US GAAP. Everything is clear now.

No matter, IFRS | US GAAP guidance, including all the indicators, boils down to this:

A company based in the US will have the USD as its functional currency. The same thing for the EUR in the eurozone (though not throughout the EU). And so on.

Then, if a company has a subsidiary in, for example, a country A and the subsidiary does most of its business in country A, subsidiary's functional currency will be FCA. If the subsidiary also does business in countries B, C and D, its functional currency will FCA, FCB, FCC or FCD, depending on which of these generate the most cash flow. If the cash flows are evenly distributed, the functional currency will be the currency in which subsidiary's liabilities (most liabilities) are denominated. If this still provides no definitive answer, a coin is flipped or a die is cast.

But seriously, a foreign subsidiary's functional currency is usually obvious.

If not, it is whatever company and its independent auditor can agree on (following, obviously, a thoughtful, rigorous, and thorough coin flip or die toss).

As discussed above, the functional currency is usually also the accounting and reporting currency. But, that is not the functional currency's actual function (no pun intended).

The main reason IFRS and US GAAP define a functional currency is to determine the method a parent will use to consolidate its foreign currency subsidiary or subsidiaries. Specifically:

They also use it to define a foreign currency (above).

If the parent's and subsidiary's functional currencies are different: translation (current rate method)
If the parent's and subsidiary's functional currencies are the same but the subsidiary's accounting currency is different: remeasurement (monetary/non-monetary method) to the functional currency (at the subsidiary).
If the parent's functional and reporting currencies are different: translation from functional currency to reporting currency.
If the parent's and subsidiary's functional currencies are different and the subsidiary's functional and accounting currencies are different: first remeasurement (subsidiary’s accounting currency to subsidiary’s functional currency) then translation (subsidiary’s functional currency to the parent's functional currency).

And so on with various, other permutations.

As the above implies, companies use two general approaches with foreign subsidiaries.

One: they give their subsidiary(ies) accounting autonomy and only consolidate the financial reports produced by those subsidiaries.

Two: they do not give their subsidiary(ies) accounting autonomy but rather require it to use companywide accounts (a single information system) and consolidate the accounts, not reports.

Regardless of approach, multi-national companies need to contend with the domestic accounting requirements of each, separate jurisdiction in addition to the requirements of IFRS or US GAAP.

As IFRS guidance and statutory accounting rules are not the same, companies apply a variety of policies to cope with these requirements.

While there is no universally recognized acronym for functional currency, this one would work.

Or, one can always spell it out.

Next, the accounting depends on whether the foreign currency involves:

IFRS and US GAAP could have opted for clear and concise guidance. For example:

Foreign currency balances (such as bank accounts, receivables, payables, loans payable or due, or passive investments) are remeasured using the monetary/non-monetary method. The resulting exchange rate differences are included in net income.
Foreign currency entities (consolidated subsidiaries or equity method investments) are translated using the current rate method. The resulting exchange rate differences are included in OCI and accumulate in AOCI.

But why do things an easy way, when a perfectly good hard way is available?

So, rather than two simple paragraphs, they opted for 22 | 30 pages to guidance that, after being thoroughly studied, leaves some readers thoroughly confused.

This claim is based on the feedback from participants in our IFRS | US GAAP trainings (link) and is not completely accurate.

While IAS 21 is written in a way that seems as if someone went out of their way to befuddle and obfuscate, ASC 830 is relatively clear and concise.

However, it does have one problem. ASC 830-20-35-2 states (edited): At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity shall be adjusted to reflect the current exchange rate. At a subsequent balance sheet date, the current rate is that rate at which the related receivable or payable could be settled at that date.

For some reason, the second sentence occasionally causes confusion, usually among those who also apply national accounting standards, which are often interpreted literally and pedantically.

To wit, not long ago, one training participant quite seriously asked how foreign currency bank balances should be treated in US GAAP.

The trainer was first perplexed by the question then answered: they are remeasured.

The ensuing discussion took over an hour.

Seriously ¯\_(ツ)_/¯

A balance

While IAS 21 and ASC 830 claim to discuss transactions, their guidance actually addresses balances.

For example, if XYZ sells a product to ABC, the sale is undoubtedly a transaction. But, assuming ABC is a foreign customer that will pay in a foreign currency, changes in exchange rates have no impact on the transaction. The transaction is simply measured by multiplying the sales price by the exchange rate on the day of the sale. What could be simpler?

What changes in exchange rates do influence is the receivable. Specifically, each time XYZ includes that receivable in a financial report, it remeasures it using the currency exchange rate on the day of the report. Finally, when it eventually collects, it remeasures it one final time. So, stating that exchange rates influence transactions is somewhat misleading because what they actually influence are the balances associated with transactions.

The same applies to balances that result from purchasing goods (or any other asset), borrowing or lending, investing in stocks or bonds, etc.

So because accurate terminology matters, at least to us, this page does not discuss foreign currency transactions. Instead we talk about foreign currency balances.

Note: those who would rather apply IFRS | US GAAP guidance literally and pedantically are advised to substitute the word "transaction" for "balance" whenever it appears here.

Fortunately, the accounting for FC balances is straightforward cash (on hand or in bank), trade accounts (receivable or payable), loans, passive investments, etc. denominated in a foreign currency are remeasured at the spot rate. Exchange rate differences are reported in net income.

To wit, ASC 830-20 gives guidance requiring practically no commentary.

ASC 830-20-35-2 states: At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity shall be adjusted to reflect the current exchange rate. At a subsequent balance sheet date, the current rate is that rate at which the related receivable or payable could be settled at that date...

Couldn't be simpler.

OK, this is a bit of an exaggeration. ASC 830 does go into a bit more detail.

For example, ASC 830-20-35-3 to 5 discuss items associated with entities even though entities (translated, not remeasured) have their own dedicated sub-topic (ASC 830-30).

Additionally, ASC 830-20-35-6 specifies that changes in fair value of available-for-sale securities need not be bifurcated (as they do in IFRS).

Paragraphs 830-20-30-2 through 30-3 also provide more information about exchange rates.

While just a quibble, ASC 830-20-30-2 discusses the unlikely scenario where exchangeability between two currencies is temporarily lacking. Could happen, but often enough to require guidance? And if it does happen, could it not be dealt with simply by applying judgment?

While we are at the nit picking, it would also have been nice if ASC 830 had put the guidance on non-monetary items (which are remeasured) in ASC 830-20 (which requires remeasurement) instead of ASC 830-10, where it is a bit harder to find.

ASC 830-10-45-18 outlines non-monetary items that are not remeasured:

Equity securities without readily determinable fair values...
Inventories carried at cost
Prepaid expenses such as insurance, advertising, and rent
Property, plant, and equipment
Accumulated depreciation on property, plant, and equipment
Patents, trademarks, licenses, and formulas
Goodwill
Other intangible assets
Deferred charges and credits, except policy acquisition costs for life insurance companies
Deferred income
Common stock
Preferred stock carried at issuance price
Revenues and expenses related to nonmonetary items, for example:

Cost of goods sold
Depreciation of property, plant, and equipment
Amortization of intangible items such as patents, licenses, and so forth
Amortization of deferred charges or credits except policy acquisition costs for life insurance entities.

Interestingly, it does not specify monetary items to be remasured, so we have added one (just for fun):

Cash
Cash equivalents
Securities (traded)
Receivables: accounts, notes, loans
Refundable deposits, holdbacks
Accounts payable
Loans, notes, bonds, leases and other financial liabilities
Contingent liabilities requiring cash settlement

Also, it would have been nice if ASC 830-20-30-4 had been emphasized because it points to ASC 830-10-55-10 and 11. These not only allow the use of averages but state the "literal application of the standards in this Subtopic might require a degree of detail in record keeping and computations that could be burdensome as well as unnecessary to produce reasonable approximations of the results. Accordingly, it is acceptable to use averages or other methods of approximation."

This is key guidance. It has the power to make a accountant's life considerably simpler than if they had to apply the guidance literally and pedantically.

One can only suppose that, once upon a time (the concept of lacking exchangeability dates back to the old ARB 43, Chapter 12 days), such a traumatic event occurred and left such an impression that the FASB carried the guidance forward into FAS 8 and again into FAS 52, to which it even added an example, which it then carried over into ASC 830-30 as ASC 830-30-55-1 (its only example).

To be honest, the example does discuss a situation when a government (the Israeli government) used a pause in trading to devalue its currency, which did catch some entities flat footed.

While not common, it is nice that the FASB wants to make sure entities account for even such highly unusual situations correctly which is, after all, the point of having accounting standards.

For its part, as IAS 21 does not mention the issue, the IASB has likely never faced such trauma. Consequently, IAS 21 does not provide any guidance on the temporarily lacking exchangeability, leaving practitioners to apply their own best judgment or, as allowed by IAS 8.12, refer to ASC 830-30 and follow the guidance illustrated in ASC 830-30-55-1.

Note: the guidance on the lack of exchangeability overrides the guidance in ASC 830-30-45-16 which states: A reporting entity's financial statements shall not be adjusted for a rate change that occurs after the date of the reporting entity's financial statements or after the date of the foreign currency statements of a foreign entity if they are consolidated, combined, or accounted for by the equity method in the financial statements of the reporting entity. However, the rate would still need to be disclosed as outlined in ASC 830-30-50-2.

Also note: while the lack of exchangeability is discussed in both ASC 830-20 and 830-30, the latter provides the more comprehensive guidance and so is cited here.

ASC 830-20-30-3 simply states the obvious: For a foreign currency transaction, the applicable rate at which a particular transaction could be settled at the transaction date shall be used to translate the transaction.

But overall, these are just minor details that, while they need to be considered, do not change the conciseness and simplicity of the overall guidance.

This does not, however, stop IAS 21 from delineating a more circumlocutious route.

IAS 21.23 starts down a straight road by discussing foreign currency monetary items (e.g. bank accounts, trade receivables, trade payables, loans receivable, loans payable, passive investments) and non-monetary items (e.g. inventory, pre-paid expenses, buildings, machinery, vehicles, equipment, patents, copyrights, tradenames) explaining that the former are remeasured while the latter are not.

IAS 21.23.b actually states: non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction.

But this is the same as if it said non-monetary items are not remeasured, just with 27 words instead of 5.

While IAS 21 assumes the term non-monetary item is self-explanatory, ASC 830-10-45-18 goes to the trouble of providing a list:

Equity securities without readily determinable fair values...
Inventories carried at cost
Prepaid expenses such as insurance, advertising, and rent
Property, plant, and equipment
Accumulated depreciation on property, plant, and equipment
Patents, trademarks, licenses, and formulas
Goodwill
Other intangible assets
Deferred charges and credits, except policy acquisition costs for life insurance companies
Deferred income
Common stock
Preferred stock carried at issuance price
Revenues and expenses related to nonmonetary items, for example:

Cost of goods sold
Depreciation of property, plant, and equipment
Amortization of intangible items such as patents, licenses, and so forth
Amortization of deferred charges or credits except policy acquisition costs for life insurance entities.

Interestingly, it does not think the term monetary item needs explaining, so does not include a list such as:

Cash
Cash equivalents
Securities (traded)
Receivables: accounts, notes, loans
Refundable deposits, holdbacks
Accounts payable
Loans, notes, bonds, leases and other financial liabilities
Contingent liabilities requiring cash settlement

So far so good.

But then, 21.23.c turns to non-monetary items at a fair value measured in a foreign currency. This seems a bit odd. Most items remeasured per IAS 16 or IAS 41 (e.g. machinery, vehicles, equipment, land, buildings) have a fair value determinable irrespective of currency. The same applies to items remeasured per IAS 38 (patents, copyrights, tradenames, brands) when, that is, they have a measurable fair value.

Hmmm?

Perhaps, theoretically, one could have a building located in a foreign country (but not owned by a foreign subsidiary) whose fair value is only determinable by reference to similar buildings in that country (though that is not the only way to determine fair value of investment property). It may also be possible that the only supplier of a particular item of merchandise is located in a foreign country and that the fair value of this merchandise can only be determined in the foreign currency.

So thanks IFRS. You sure do think of everything, even issues that do not arise 99.9% of the time.

The next few paragraphs they clarify this guidance, including pearls of wisdom such as (IAS 21.29) "When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement, an exchange difference results..." Thanks again IFRS. What would we have done without your help.

Nevertheless, though a bit verbose, the guidance follows a straight path until it gets to IAS 21.32. Why has the guidance, all of a sudden, taken a turn to entities, when the topic at hand is balances?

IAS 21.32 states: Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation (see paragraph 15) shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment in accordance with paragraph 48.

A.k.a net investments in a foreign operations, the guidance on how to treat foreign currency entities is provided in a separate section of the guidance, IAS 21.38 to 49.

Oh yes, I see. A parent could have power over a foreign subsidiary (which would thus need to be translated and consolidated) and, at the same time, sell goods to the subsidiary (which would only result in a regular receivable). IAS 21.32 is there to make sure the two or three entities for which this is an issue use the proper accounting. For good measure, IAS 21.33 and 34 then explain what IAS 21.32 just explained.

As intercompany balances are eliminated in consolidation; this guidance is only useful to the handful of entities publishing separate financial reports. This makes one wonder why the IASC decided put this guidance, confusingly, in IAS 21 or why the IASB has not moved it to IAS 27, where it logically belongs.

While some companies, for example IKEA UK, publish separate IFRS financial reports, the vast majority only publish consolidated reports.

True, practically all companies doing business internationally also create separate reports, but these are invariably set up according to national GAAP and published for statutory reasons, not an issue from an IFRS perspective.

The guidance could theoretically be helpful if a company is planning to start applying IFRS at the subsidiary level, for example it intends to spin off that subsidiary.

It may also be useful for internal purposes, allowing management to get a better grasp on actual, foreign currency subsidiary cash flows.

It may also be useful if the subsidiary is domiciled in a jurisdiction that accepts IFRS for statutory and/or tax reporting purposes.

However, as a general rule, these paragraphs can be safely ignored by 99% of all entities.

As outlined in IFRS 10, the determining factor for consolidation is power. As also outlined in IFRS 11 and 12 partial power results in joint ventures and joint operations. The account for all these is broadly similar and significantly different than for passive investments that do not give the investor any power. A more detailed discussion of these issues is provided on the consolidation page.

IAS 21.32 (assuming one also reads 15 and 15A) guides one to treat the regular receivable as a regular receivable (remasurement forex differences through net income) not as part of the investment (translation forex difference through comprehensive income).

IAS 21.15: An entity may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation, and is accounted for in accordance with paragraphs 32 and 33. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables.

IAS 21.15A: The entity that has a monetary item receivable from or payable to a foreign operation described in paragraph 15 may be any subsidiary of the group. For example, an entity has two subsidiaries, A and B. Subsidiary B is a foreign operation. Subsidiary A grants a loan to Subsidiary B. Subsidiary A’s loan receivable from Subsidiary B would be part of the entity’s net investment in Subsidiary B if settlement of the loan is neither planned nor likely to occur in the foreseeable future. This would also be true if Subsidiary A were itself a foreign operation.

At the final fork in the road, IAS 21.35 to 37 deals with changes in functional currency.

Finally, a critical junction.

While the procedure (prospectively from the date of the change) is obvious, IAS 21.36 does point out that the functional currency "can be changed only if there is a change to those underlying transactions, events and conditions" emphasizing that the determination of a functional currency in IFRS is a matter of fact not a policy decision as in some national GAAPs.

For example, in the Czech Republic, an entity can choose to have a functional currency or not and can even choose the functional currency it would like.

In other countries, for example Switzerland, the guidance law is similar to IFRS making the functional currency a given, based on a set of defined parameters (as discussed in the introduction to this section).

An entity

The accounting for foreign currency entities can be straightforward: at the end of each period, the parent translates its foreign currency subsidiaries (or other group entities) into its functional currency. Next, it consolidates those subsidiaries and publishes a financial report denominated in its reporting currency, which is the same as its local currency.

IAS 21.44 | ASC 830-10-15-5 discuss foreign operations | foreign investees. However, in both cases these are entities over which some other entity has power (or partial power) | control (or significant influence).

From an accounting perspective, entities are translated, while balances (discussed above) are remeasured.

Technically, an entity may, in unusual circumstances, be remeasure. For example if a subsidiary's functional currency is the same as its parent's, but its accounting currency is different, the subsidiary would remeasure its books to its functional currency, which, being the same as the parent's, would not need to be translated.

However, balances are always remeasured, never translated, even though IAS 21 does, confusingly, refer to the remeasurement of balances as a translation.

Somewhat confusingly, IAS 21 uses "translation" to denote the procedure outlined in IAS 21.23 (monetary/non-monetary method) as well in IAS 21.39 (current/non-current method).

To avoid potential confusion, ASC 830 refers to the former as "remeasurement" (ASC 830-10-45-18) and the latter as "translation" (ASC 830-30-45-3).

Since the guidance in IAS 21.23 is comparable to the guidance in ASC 830-10-45-18 and the guidance in IAS 21.39 is comparable to ASC 830-30-45-3 and 12, this page, to avoid confusion, refers to "remeasurement" as remeasurement and "translation" as translation.

IAS 21.39 states: The results and financial position of an entity... shall be translated into a different presentation currency using the following procedures:

assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
all resulting exchange differences shall be recognised in other comprehensive income.

ASC 830-30-45-3 states: All elements of financial statements shall be translated by using a current exchange rate as follows:

For assets and liabilities, the exchange rate at the balance sheet date shall be used.
For revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized shall be used.

This guidance also applies to accounting allocations (for example, depreciation, cost of sales, and amortization of deferred revenues and expenses) and requires translation at the current exchange rates applicable to the dates those allocations are included in revenues and expenses (that is, not the rates on the dates the related items originated).

ASC 830-30-45-12 adds: If an entity's functional currency is a foreign currency, translation adjustments result from the process of translating that entity's financial statements into the reporting currency. Translation adjustments shall not be included in determining net income but shall be reported in other comprehensive income.

However, nothing stops an entity from making policy choices that will make the process far less straightforward.

Entities have latitude to use various currencies for bookkeeping and reporting purposes.

In one possible scenario, the parent and subsidaries share the same functional currency, but the subsidiary keeps its books in its local currency. In this scenario, the parent would not translate the subsidiary's results into its functional currency. Instead, the subsidiary remeasures its books into its (and the parent's) functional currency.

Some jurisdictions require locally domiciled legal entities to apply national statutory accounts and to denominate those accounts in the national currency.

While there is no requirement preventing such an entity from keeping two sets of accounts (one for IFRS | US GAAP and the other for national GAAP purposes), it is common for such an entity to keep its national accounts in the local currency, even if it is a subsidiary of a parent that applies IFRS | US GAAP.

If the subsidiary's functional currency was also its local currency, it would translate (not remeasure) its results into the parent's functional currency (after adjusting for any differences between national GAAP and IFRS | US GAAP accounting guidance).

It may, however, be possible the subsidiary and parent share the same functional currency, then the subsidiary remeasures (not translates) its accounts into its (and the parent's) functional currency.

It may also be possible the subsidiary's and parent's functional currencies are different. In this scenario, the first step would be a remeasurement: the subsidiary's accounting to its functional. The second step a translation: subsidiary's functional to the parent's functional.

Note: regardless of the scenario, it is important to keep in mind, from the IFRS | US GAAP perspective, the accounting and reporting currencies are policy choices, but the functional currency is a matter of fact. Entities are not free to choose the functional currency they would like. Instead, they are required to select the functional currency best reflecting their economic environment.

Somewhat confusingly, IAS 21 uses "translation" to denote the procedure outlined in IAS 21.23 (monetary/non-monetary method) as well in IAS 21.39 (current/non-current method).

To avoid potential confusion, ASC 830 refers to the former as "remeasurement" (ASC 830-10-45-18) and the latter as "translation" (ASC 830-30-45-3).

Since the guidance in IAS 21.23 is comparable to the guidance in ASC 830-10-45-18 and the guidance in IAS 21.39 is comparable to ASC 830-30-45-3, this page, to avoid confusion, refers to "remeasurement" as remeasurement and "translation" as translation.

Interestingly, IAS 21.23.a also specifies that "foreign currency monetary items shall be translated using the closing rate." In contrast, ASC 830-10-45-18 assumes this is understood so makes no mention of how to deal with monetary items. It does, however, provide an itemized list of non-monetary items (presumably to help those who lack imagination).

Equity securities without readily determinable fair values...
Inventories carried at cost
Prepaid expenses such as insurance, advertising, and rent
Property, plant, and equipment
Accumulated depreciation on property, plant, and equipment
Patents, trademarks, licenses, and formulas
Goodwill
Other intangible assets
Deferred charges and credits, except policy acquisition costs for life insurance companies
Deferred income
Common stock
Preferred stock carried at issuance price
Revenues and expenses related to nonmonetary items, for example:

Cost of goods sold
Depreciation of property, plant, and equipment
Amortization of intangible items such as patents, licenses, and so forth
Amortization of deferred charges or credits except policy acquisition costs for life insurance entities.

For good measure, ASC 830-10-45-18.m also lists expenses related to non-monetary items.

Nothing like dotting the I's and crossing the T's.

Note: IAS 21.23.c also discusses non-monetary items carried at fair value in a foreign currency. Since US GAAP does not allow non-monetary items to be carried at fair value, it does not mention this (unusual) situation.

This guidance may seem unnecessary since most items remeasured per IAS 16, IAS 38, or IAS 41 (e.g., machinery, vehicles, equipment, patents, copyrights, and tradenames) have a fair value that can be determined irrespective of currency.

Nevertheless, theoretically, one could have a building located in a foreign country (but not owned by a foreign subsidiary) whose fair value is only determinable by reference to similar buildings in that country (though that is not the only way to determine fair value of investment property). It may also be possible that the only supplier of a particular item of merchandise is located in a foreign country and that the fair value of this merchandise can only be determined in the foreign currency.

So, if one ever runs into such an item, it is good to know there is guidance available.

In another scenario, an entity might keep its books in one currency, report in another, and have a different functional currency. In such a case, it would first remeasure its books into its functional currency and then translate its results into its reporting currency. IAS 21.38 to 43 addresses this situation.

While entities may choose their accounting and/or reporting currency, IAS 21 and ASC 830 lay out criteria for determining the functional currency based on the entity's economic environment. This determination is not discretionary but a matter of fact.

A more detailed discussion on how to determine a functional currency is provided in the above section.

Note: although US GAAP does provide explicit guidance for such a scenarios, the outcome generally aligns with IFRS.

To cover possibilities, IFRS provides comprehensive, if somewhat convoluted, guidance. US GAAP, on the other hand, provides guidance that will generally yield the same result, but does so more succinctly.

One of the more mysterious aspects of the guidance, IAS 21.38 starts off the discussion of foreign currency entities by outlining the procedure to be used if the presentation currency is different from the functional currency.

Why it decided to lead off with this issue, as practically no company chooses to present its results in a currency other than its functional currency, is not clear.

Also not clear, why does it devote two long, black-letter paragraphs (IAS 21.42 and 43) to hyperinflationary economies that are not particularly common and already have their separate, stand-alone guidance (IAS 29)?

Actually, it is very clear. Back in 1983, when the IASC first adopted IAS 21, hyperinflation was much more of an issue that it in the 2020s a time when central banks (except in marginal countries) have gotten very good at managing inflation. Taking the historical context into account, while it makes guidance seem a bit dated, it is perfectly understandable.

But, fortunately, at least it does not dwell on hedge accounting.

While hedging foreign currency risk risk is common and can have a significant impact both on reported results and an entity’s actual economics, it is not dealt with in IAS 21, which simply refers to IFRS 9.

Similarly, this site addresses forex hedging in its cash and investments section.

However, if one continues reading, one eventually gets to IAS 21.44 which, somewhat surprisingly, since this is the most important issue facing practically every entity, is not even presented as a black-letter paragraph.

Fortunately, the first sentence of paragraph 44 refers back to paragraph 39, so those readers who used the index to skip ahead know they have to go back and read the guidance on presentation currency.

Somewhat confusing? To be sure. Impossible to follow? Fortunately not.

The only odd thing about ASC 830-30 is that the sub-topic has no recognition or measurement sections but, like the overall, jumps straight to derecognition (ASC 830-30-40) and other presentation matters (ASC 830-30-45).

Once there, ASC 830-30-45-3 provides simple and straightforward guidance on how to use a current rate method.

The only, minor, criticisms, ASC 830-30's guidance on exchange rates leaves a bit (maybe a lot to be desired). But at least it devotes little attention to hedge accounting and none to highly inflationary economies.

The most pertinent guidance is provided by ASC 830-30-45-6, which specifies that, in usual circumstances, the exchange rate will reflect the rate for dividend remittances. This implies the market rate because, in order for a foreign subsidiary to pay its parent dividends, it would need to acquire the parent's currency, presumably in a market transaction.

However, in its implementation guidance, ASC 830-20-55-1.c specifies that the exchange rate used would be the official exchange rate (less a transaction fee).

Similarly, the SEC (830-30-S99-1) also alludes to the official rate but suggests that this rate would only be appropriate in countries with currency restrictions in place.

While this is a marginal issue in most circumstances, it is common practice for national GAAPs to require locally domiciled entities to use the official, declared rates for accounting purposes even if those rates are different from market rates.

Thus, the question that often arises is whether an entity must use a market rate, which can be cumbersome to determine and document, or if it can use the official declared rate, which is generally available for download from the central bank's website.

Unfortunately, there is no clear answer to this question.

As a general rule, the declared rate can serve as a shortcut provided it is realistic. If not, a market rate would need to be determined, its determination method documented, as the method used would, practically always, be subject to audit by the entity's independent auditor, especially when there is a significant difference between market rates and official, declared rates.

Hedging foreign currency risk is common and can have a significant impact both on reported results and an entity’s actual economics. However, it is not dealt with in ASC 830, which simply refers to ASC 815.

Similarly, this site addresses forex hedging in its cash and investments section.

Unlike IAS 23, which not only devotes two black letter paragraphs to this issue, but includes the guidance prominently in its translation section, ASC 830 only mentions in the introduction and only in so far as it affects the selection of the functional currency. This lack of prominence is appropriate given how few economies are highly inflationary and how few entities are affected by the issue.

Given the current state of the world, it is actually surprising that the issue is given as much attention as it is. However, back in 1981, when it was introduced in FAS 52, high inflation was very pertinent. Since then, central banks (except in marginal countries) have gotten very good at managing inflation so it is not so any longer. But, given the historical context (and the FASB's penchant for holding on to outdated guidance until it becomes completely and totally irrelevant), perfectly understandable.

ccccccccccccccccccccccccccccccccc

Account receivable

12/15/X1, XYZ sold goods to a foreign customer for FC 2,000 payable on 1/15/X2. The exchange rates were 0.903, 0.885 and 0.907 on 12/15/X1, 12/31/X1 and 1/15/X2.

A discussion of how exchange rates are determined is provided above, in the cash illustration .

Dr/Cr

12/15/X1 \| 15.12.X1
Account receivable: FC		1,806
	Revenue		1,806

12/31/X1 \| 31.12.X1
Foreign currency remeasurement loss		36
	Account receivable: FC		36

1/15/X2 \| 15.1.X2
Cash in bank		1,814
	Account receivable: FC		1,770
	Foreign currency remeasurement gain		44

XYZ does not have a separate bank account for this currency.

Its FC receipts are thus debited to its LC bank account at the bank's exchange rate.

The payable example above illustrates the accounting when a separate, foreign currency bank account is used.

Account payable

12/15/X1, XYZ bought goods from a foreign supplier for FC 2,000 payable on 1/15/X2. The exchange rates were 0.903, 0.885 and 0.907 on 12/15/X1, 12/31/X1 and 1/15/X2. XYZ does not use a separate bank account for this foreign currency.

A discussion of how exchange rates are determined is provided above, in the cash illustration .

Dr/Cr

12/15/X1 \| 15.12.X1
Inventory		1,806
	Account payable: FC		1,806

12/31/X1 \| 31.12.X1
Account payable: FC		36
	Foreign currency remeasurement gain		36

1/15/X2 \| 15.1.X2
Foreign currency remeasurement loss		44
Account payable: FC		1,814
	Account payable: FC		44
	Cash in bank		1,814
	Or simply

Foreign currency remeasurement loss		44
Account payable: FC		1,770
	Cash in bank		1,814

Same facts except XYZ uses separate accounts / bank accounts for FC balances and transactions.

1/12/X1, it had 100,000 of the FC on hand. The exchange rates on 12/1/X1 and 1/31/X2 were 0.895 on and 0.910.

12/1/X1 \| 1.12.X1		Balance in CR		Balance in FC
Cash in bank: FC			89,500		100,000

12/15/X1 \| 15.12.X1		Transaction in CR		Transaction in FC
Inventory		1,806		---
	Account payable: FC		1,806		2,000

12/31/X1 \| 31.12.X1		Remeasurement in CR
Foreign currency remeasurement loss		964
Account payable: FC		36
	Cash in bank: FC		1,000

12/31/X1 \| 31.12.X1	Balance in CR		Balance in FC
Cash in bank: FC		88,500		100,000
Account payable: FC		(1,770)		(2,000)

1/15/X2 \| 15.1.X2		Transaction in CR		Transaction in FC
Foreign currency remeasurement loss		44
Account payable: FC		1,814		2,000
	Account payable: FC		44
	Cash in bank: FC		1,814		2,000

1/31/X2 \| 31.1.X2		Remeasurement in CR
Cash in bank: FC		294
	Foreign currency remeasurement gain		294

12/1/X1 \| 1.12.X1		Balance in CR		Balance in FC
Cash in bank: FC			89,180		98,000

Advance paid

12/1/X1, XYZ ordered equipment #123 for FC 20,000 and paid an advance of FC 5,000.

The equipment was delivered 12/15/X1 and XYZ paid an additional FC 5,000 in cash. It paid the remainder on 1/15/X2. The exchange rates was 0.9043, 0.9032, 0.8851 and 0.9073 on 12/1/X1, 12/15/X1, 12/31/X1 and 1/15/X2.

A discussion of how exchange rates are determined is provided above, in the cash illustration .

Dr / Cr

12/1/X1 / 1.12.X1
Advance paid: FC (Equipment #123)		4,522
	Cash in bank		4,522

12/15/X1 / 15.12.X1
Equipment #123		18,070
	Advance paid: FC (Equipment #123)		4,522
	Cash in on hand		4,516
	Accounts Payable: FC		9,032

In 2016, the IFRIC felt the need to clarify the treatment for deposits paid in an FC.

In IFRIC 22.3, the Committee explains: The IFRS Interpretations Committee (the Interpretations Committee) initially received a question asking how to determine ‘the date of the transaction’ applying paragraphs 21–22 of IAS 21 when recognising revenue. The question specifically addressed circumstances in which an entity recognises a nonmonetary liability arising from the receipt of advance consideration before it recognises the related revenue. In discussing the issue, the Interpretations Committee noted that the receipt or payment of advance consideration in a foreign currency is not restricted to revenue transactions. Accordingly, the Interpretations Committee decided to clarify the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income when an entity has received or paid advance consideration in a foreign currency.

In IFRIC 22.8 the Committee clarifies: applying paragraphs 21–22 of IAS 21, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration.

While clarifying "the date of the transaction for the purpose of determining the exchange rate" may seem like a cryptic saying: do not remeasure deposits, example 1 clarifies this clarification:

Example 1 (paraphrased): on April 1, entity A pays a deposit of FC1,000 (example 1 does not specify a forex-rate, but it could be 1.25:1) for a machine and so records:

Non-monetary asset		1,250
	Cash in bank		1,250

On April 15, it takes delivery of the machine and "applying paragraph 23(b) of IAS 21 The Effects of Changes in Foreign Exchange Rates, Entity A does not update the translated amount of that non-monetary asset" so records:

Machine		1,250
	Non-monetary asset		1,250

Probably because it has not occurred the EITF the issue needs clarifying, it has not clarified it.

12/31/X1 / 31.12.X1
Accounts Payable: FC		181
	Foreign currency remeasurement gain		181

1/15/X2 / 15.1.X2
Foreign currency remeasurement loss		222
Accounts Payable: FC		9,073
	Accounts Payable: FC		222
	Cash in bank		9,073
	Or simply

Foreign currency remeasurement loss		222
Account payable: FC		8,851
	Cash in bank		9,073

Same facts except 12/1/X1, XYZ ordered a custom-made machine (#234) from ABC for FC 25,000.

The work was performed in stages and XYZ agreed to make payments starting with an upfront deposit. Payment of 5,000 were made 1/12/X1, 12/15/X1, 1/15/X2 and 1/31/X2. The machine was delivered 1/31/X2 and XYZ made the final payment of 5,000 on 2/15/X2, after testing confirmed that the machine met specifications. The spot rate on 1/31/X2 and 2/15/X2 was 0.8916 and 0.9091.

12/1/X1 / 1.12.X1
Advance paid: FC (Machine #234)		4,522
	Cash in bank		4,522

12/15/X1 / 15.12.X1
Advance paid: FC (Machine #234)		4,516
	Cash in bank		4,516

12/31/X1 / 31.12.X1 (US GAAP only)
Foreign currency remeasurement loss		187
Advance paid: FC (Machine #234)		4,239
	Cash in bank		4,426

1/15/X2 / 15.1.X2
Advance paid: FC (Machine #234)		4,537
	Cash in bank		4,537

1/31/X2 / 31.1.X2 (IFRS)
Machine #234		22,490
	Advance paid: FC (Machine #234)		13,574
	Cash in on hand		4,458
	Accounts Payable: FC		4,458

1/31/X2 / 31.1.X2 (US GAAP)
Machine #234		22,290
	Foreign currency remeasurement gain		14
	Advance paid: FC (Machine #234)		13,374
	Cash in on hand		4,458
	Accounts Payable: FC		4,458

2/15/X2 / 15.2.X2
Foreign currency remeasurement loss		88
Accounts Payable: FC		4,458
	Cash in bank		4,546

Financial instrument

12/15/X1, XYZ bought 100 shares of ABC stock for FC 20.00 each. On 12/31/X1, the shares were trading for FC 21.00 and on 1/15/X2 it sold them for FC 19.50. The exchange rates on 12/15/X1, 12/31/X1 and 1/15/X2 were 0.9175, 0.8925 and 0.9925.

A discussion of how exchange rates are determined is provided above, in the cash illustration .

Dr/Cr

12/15/X1 \| 15.12.X1
Investment (ABC stock)		1, 835
	Cash in bank		1, 835

12/31/X1 \| 31.12.X1
Investment (ABC stock)		40
	Gain on Investment		40

1/15/X2 \| 15.1.X2
Investment (ABC stock)		75
	Gain on Investment		75
Cash in bank		1,950
	Investment (ABC stock)		1,950

“Monetary” investment (IFRS only)

same, except that XYZ acquired a note. XYZ acquired the note at its nominal value of 2,000 (with no premium or discount to amortize). The note's market value on 12/31/X1 and 1/15X2 was 2,100 and 1,950. Interest of 8% was paid on 12/31/X1.

12/15/X1 \| 15.12.X1
Investment (AFS notes)		1, 835
	Cash in bank		1, 835

12/31/X1 \| 31.12.X1
Cash in bank		143
	Interest income		143
Exchange rate loss		49
	Investment (AFS notes)		49
Investment (AFS notes)		89
	Gain in OCI		89
Gain in OCI		89
	Accumulated OCI		89

FC purchase price	Exchange rate	CR purchase price	Forex Gain (loss)	FC market price	Fair value in CR	Total Gain (loss)	Investment Gain (loss)
A	B	C=A x B	D=_(C+1)-C	E	F=B x E	G=_(F+1)-F	H=G-D
2,000	0.9175	1,835		2,000	1,835
2,000	0.8930	1,786	(49)	2.100	1,875	40	89
2,000	1.0000	2,000	214	1,950	1,950	75	(139)

1/15/X2 \| 15.1.X2
Investment (AFS notes)		214
	Exchange rate gain		214
Loss in OCI		139
	Investment (AFS notes)		139
Accumulated OCI		139
	Loss in OCI		139
Cash in bank		1,950
	Investment (AFS notes)		1,950
Loss		50
	Reclassification adjustment		50
Reclassification adjustment		50
	Accumulated OCI		50

Fair value hedge

12/15/X1, XYZ bought goods for FC 2,000 (CR 1, 835) on 30-day credit. To hedge the payable, it entered into a 30-day call for FC 2,000 at 0.9175. 1/15/X2, XYZ paid the supplier and settled the forward. The exchange rates were: 0.9175 on 12/15/X1, 0.8930 on 12/31/X1 and 1.000 on 1/15/X2.

A discussion of how exchange rates are determined is provided above, in the cash illustration .

Dr/Cr

12/15/X1 \| 15.12.X1
Inventory		1, 835
	Accounts payable in FC		1, 835
Forward contract		0
	Forward contract		0

12/31/X1 \| 31.12.X1
Accounts payable in FC		49
	Exchange rate gain		49
Loss on foreign currency fair value hedge		49
	Forward contract		49

1/15/X2 \| 15.1.X2
Exchange rate loss		214
	Accounts payable in FC		214
Forward contract		214
	Gain on foreign currency fair value hedge		214
Accounts payable in FC		2,000
	Cash in bank: CR		2,000
Cash in bank: CR		165
	Forward contract		165

Fair value hedge, premium

Same facts, except that XYZ call was at a rate of 0.9075.

Dr/Cr

12/15/X1 \| 15.12.X1
Inventory		1, 835
	Accounts payable in FC		1, 835
Deferred Hedging expense		20
	Forward contract		20

12/31/X1 \| 31.12.X1
Accounts payable in FC		49
	Exchange rate gain		49
Loss on foreign currency fair value hedge		49
	Forward contract		49
Hedging expense		10
	Deferred Hedging expense		10

1/15/X2 \| 15.1.X2
Exchange rate loss		214
	Accounts payable in FC		214
Forward contract		214
	Gain on foreign currency fair value hedge		214
Accounts payable in FC		2,000
	Cash in bank		2,000
Cash in bank		145
	Forward contract		145
Hedging expense		10
	Deferred Hedging expense		10

Fair value hedge of firm commitment hedged with non-derivative contract

Same facts, except that XYZ agreed to buy goods for FC 2,000. The agreement included a penalty making it likely that XYZ would honor. The same day it agreed to buy FC 2,000 at 0.9175 from an FC dealer. The agreement required delivery of the FC, with no net settlement provision. XYZ agreed to pay the dealer fixed commission of CR 16 upon delivery of the FC.

Dr/Cr

12/15/X1 \| 15.12.X1
Foreign currency receivable from dealer		1,835
Premium		16
	Payable to dealer		1,850

12/31/X1 \| 31.12.X1
Loss on hedge		49
	Foreign currency receivable from dealer		49
Firm commitment		49
	Forex Gain		49
Hedging expense		8
	Premium		8

1/15/X2 \| 15.1.X2
Foreign currency receivable from dealer		214
	Forex Gain		214
Forex loss		214
	Firm commitment		214
Payable to dealer		1, 850
	Cash in bank: CR		1, 850
Cash in bank: FC		2,000
	Foreign currency receivable from dealer		2,000
Inventory		1,835
Firm commitment		165
	Cash in bank: FC		2,000
Hedging expense		8
	Premium		8

Cash flow hedge

12/15/X1, XYZ forecast that it would buy merchandise for FC 2,000 on 1/15/X2. To hedge the expected cash outflow, it entered into a contract to call FC 2,000 at 0.9175 on 1/15/X2. 1/15/X2, it bought the merchandise for FC 2,000 in cash and resold it for CR 3,000 on 2/1/X2. The exchange rates were: 0.9175 on 12/15/X1, on 0.8930 on 12/31/X1 and 1.000 on 1/15/X2.

A discussion of how exchange rates are determined is provided above, in the cash illustration .

Dr/Cr

12/31/X1 \| 31.12.X1
Loss (Other Comprehensive Income)		49
	Forward contract		49
Closing entry
Accumulated OCI		49
	Loss (Other Comprehensive Income)		49

1/15/X2 \| 15.1.X2
Forward contract		214
	Gain (Other Comprehensive Income)		214
Closing entry
Gain (Other Comprehensive Income)		214
	Accumulated OCI		214

1/15/X2 \| 15.1.X2
Cash in bank: CR		165
	Forward contract		165
Inventory		2,000
	Cash in bank: CR		2,000

2/1/X2 \| 1.2.X2
Accounts receivable		3,000
	Revenue		3,000
Cost of goods sold		2,000
	Inventory		2,000
Accumulated OCI		165
	Cost of goods sold		165

Cash flow hedge, outflow, invoice

Same facts except XYZ expected to buy the merchandise on 30-day credit and thus acquired a call contract with a strike date of 2/15/X2. On 2/15/X2, the exchange rate was 1.0750.

Dr/Cr

12/31/X1 \| 31.12.X1
Loss (Other Comprehensive Income)		49
	Forward contract		49
Closing entry
Accumulated OCI		49
	Loss (Other Comprehensive Income)		49

1/15/X2 \| 15.1.X2
Forward contract		214
	Gain (Other Comprehensive Income)		214
Closing entry
Gain (Other Comprehensive Income)		214
	Accumulated OCI		214

1/15/X2 \| 15.1.X2
Inventory		2,000
	Account payable: FC		2,000

2/1/X2 \| 1.2.X2
Accounts receivable		3,000
	Revenue		3,000
Cost of goods sold		2,000
	Inventory		2,000
Accumulated OCI		165
	Cost of goods sold		165

2/15/X2 \| 15.2.X2
Exchange rate loss		150
	Account payable		150
Exchange rate gain		150
	Forward contract		150
Account payable: FC		2,150
	Cash in bank		2,150
Cash in bank		315
	Forward contract		315

Cash flow hedge, forecast inflow

12/15/X1, XYZ forecast that it would sell goods valued at FC 3,000 in an FC on 1/15/X2. To hedge the transaction, it entered into contract to put FC 3,000 call at 0.9175 (CR 2,753) on 1/15/X2.

Dr/Cr

12/15/X1 \| 15.12.X1
Forward contract		0
	Forward contract		0

12/31/X1 \| 31.12.X1
Forward contract		74
	Gain (Other Comprehensive Income)		74
Closing entry
Gain (Other Comprehensive Income)		74
	Accumulated OCI		74

1/15/X2 \| 15.1.X2
Loss (Other Comprehensive Income)		321
	Forward contract		321
Closing entry
Accumulated OCI		321
	Loss (Other Comprehensive Income)		321

1/15/X2 \| 15.1.X2
Cash in bank: FC		3,000
	Revenue		2,753
	Accumulated OCI		248
Cash in bank: CR		2,753
Forward contract		248
	Cash in bank: FC		3.000

Subsidiary

At the beginning of period one, XYZ established a foreign subsidiary and transferred it ¤10,000 in startup capital. ABC immediately converted the funds into its local currency (the FC from XYZ's perspective) at an exchange rate of 1:1.20.

During the period, ABC acquired inventory, furniture and equipment, and a distribution license for FC 1,800, FC 6,600 and FC 3,600 respectively. At the end of the period consolidated financial statements were prepared. The exchange rate as at the balance sheet date was 1:1.15.

As no transactions between XYZ and ABC occurred, the only item to be eliminated was the InterCo investment.

	XYZ (¤)	ABC (FC)	FX rate	ABC (¤)		XYZ / ABC (¤)
Cash	¤ 1,000		1.15			¤ 1,000
Receivables	¤ 5,000		1.15			¤ 5,000
Inventory	¤ 10,000	FC 1,800	1.15	¤ 1,565		¤ 11,565
Accruals	¤ 1,000		1.15			¤ 1,000
Current assets	¤ 17,000	FC 1,800	1.15	¤ 1,565		¤ 18,565
Financial assets: Investments	¤ 8,000		1.15			¤ 8,000
Financial assets: InterCo: Equity: ABC	¤ 10,000		1.15		(¤ 10,000)
Property plant and equipment	¤ 35,000	FC 6,600	1.15	¤ 5,739		¤ 40,739
Intangible assets	¤ 30,000	FC 3,600	1.15	¤ 3,130		¤ 33,130
Total assets	¤ 100,000	FC 12,000		¤ 10,435		¤ 100,435

Payables	(¤ 5,000)		1.15			(¤ 5,000)
Loans	(¤ 20,000)		1.15			(¤ 20,000)
Total Liabilities	(¤ 25,000)		1.15			(¤ 25,000)
Paid in capital	(¤ 50,000)	(FC 12,000)	1.20	(¤ 10,000)	¤ 10,000	(¤ 50,000)
Retained earnings	(¤ 25,000)					(¤ 25,000)
Accumulated OCI				(¤ 435)<		(¤ 435)
Total equity	(¤ 75,000)	(FC 12,000)		(¤ 10,435)		(¤ 75,435)
Liabilities and equity	(¤ 100,000)	(FC 12,000)		(¤ 10,435)		(¤ 100,435)

As outlined in IFRS 21.39.a, assets and liabilities are translated using the ex-rate on the balance sheet date. While not identical, ASC 830-30-45-3 provides comparable guidance.

Note: while not specifically discussed, paid in capital is converted using the same rate as when it was paid in.

Also note: special guidance for hyperinflationary economies.

As outlined in IFRS 21.39.c, exchange differences resulting from the translation to a presentation currency different than the functional currency, are included in other comprehensive income. While ASC 830-30-45-12 words it somewhat differently, it provides comparable guidance.

For simplicity, this illustration only presents the balance sheet so only the OCI accumulation is shown. The following illustrations present an income statement with the OCI adjustment.

In period two, XYZ and ABC recognized the following transactions, all of which were with third parties. The exchange rate as at the balance sheet date was 1:1.15 and the weighted average rate for the year was 1:1.25. Consolidated financial statements were prepared.

XYZ
Cash		¤ 20,000
	Revenue		¤ 20,000
Cost of sales		¤ 9,500
	Inventory		¤ 9,500
Administrative expenses		¤ 5,000
	Cash		¤ 5,000
Cash		¤ 3,000
	Receivables		¤ 3,000

ABC
Cash		FC 3,450
	Revenue		FC 3,450
Cost of sales		FC 1,725
	Inventory		FC 1,725
Administrative expenses		FC 575
	Cash		FC 575

To improve readability, the transactions are presented in aggregate.

As no transactions between XYZ and ABC occurred, the only item to be eliminated was the InterCo investment.

	XYZ (¤)	ABC (FC)	FX rate	ABC (¤)		XYZ / ABC (¤)
Revenue	(¤ 20,000)	(3,450.00)	1.25	(¤ 2,760)		(¤ 22,760)
Cost of sales	¤ 9,500	1,725.00	1.25	¤ 1,380		¤ 10,880
Gross profit	(¤ 10,500)	(1,725.00)	1.25	(¤ 1,380)		(¤ 11,880)
Administrative expenses	¤ 5,000	575.00	1.25	¤ 460		¤ 5,460
Net income	(¤ 5,500)	(1,150.00)	1.25	(¤ 920)		(¤ 6,420)
OCI				¤ 1,239		¤ 1,239
Comprehensive income	(¤ 5,500)	(1,150.00)		¤ 319		(¤ 5,181)

Cash	¤ 19,000	FC 2,875	1.30	¤ 2,212		¤ 21,212
Receivables	¤ 2,000		1.30			¤ 2,000
Inventory	¤ 500	FC 75	1.30	¤ 58		¤ 558
Accruals	¤ 1,000		1.30			¤ 1,000
Current assets	¤ 22,500	FC 2,950	1.30	¤ 2,269		¤ 24,769
Financial assets: Investments	¤ 8,000		1.30			¤ 8,000
Financial assets: InterCo: Equity: ABC	¤ 10,000		1.30		(¤ 10,000)
Property plant and equipment	¤ 35,000	FC 6,600	1.30	¤ 5,077		¤ 40,077
Intangible assets	¤ 30,000	FC 3,600	1.30	¤ 2,769		¤ 32,769
Total assets	¤ 105,500	FC 13,150	1.30	¤ 10,115		¤ 105,615

Payables	(¤ 5,000)		1.30			(¤ 5,000)
Loans	(¤ 20,000)		1.30			(¤ 20,000)
Total Liabilities	(¤ 25,000)		1.30			(¤ 25,000)
Paid in capital	(¤ 50,000)	(FC 12,000)	1.20	(¤ 10,000)	¤ 10,000	(¤ 50,000)
Retained earnings	(¤ 30,500)	(FC 1,150)		(¤ 920)		(¤ 31,420)
Accumulated OCI				¤ 805		¤ 805
Total equity	(¤ 80,500)	(FC 13,150)		(¤ 10,115)		(¤ 80,615)
Liabilities and equity	(¤ 105,500)	(FC 13,150)		(¤ 10,115)		(¤ 105,615)

As outlined in IFRS 21.39.a, assets and liabilities are translated using the ex-rate on the balance sheet date. While not identical, ASC 830-30-45-3 provides comparable guidance.

As outlined in IFRS 21.39.b, income and expenses are translated at the exchange rates at the dates of the transactions.

However, IFRS 21.40 also states (edited): For practical reasons, ... an average rate for the period is often used...

While ASC 830-30-45 does not include a similar practical expedient, ASC 830-10-55-10 does allow the use of averages, so the overall guidance is comparable.

Note: these expedients can only be used if they do not lead to material differences.

Also note: companies applying a transaction date method invariably use software designed to automate this process. Consequently, an illustration of how this would be done is not necessary.

In period three, XYZ and ABC recognized the following transactions, including between themselves. The exchange rate as at the balance sheet date was 1:1.19 and the weighted average rate for the year was 1:1.20. Consolidated financial statements were prepared.

With third parties

XYZ
Inventory		¤ 25,000
	Cash		¤ 25,000
Cash		¤ 35,000
Receivables		¤ 5,000
	Revenue		¤ 40,000
Cost of sales		¤ 20,000
	Inventory		¤ 20,000
Administrative expenses		¤ 5,000
	Cash		¤ 5,000
Financial assets		¤ 22,000
	Cash		¤ 22,000

ABC
Inventory		FC 3,000
	Cash		FC 3,000
Cash		FC 6,000
	Revenue		FC 6,000
Cost of sales		FC 3,000
	Inventory		FC 3,000
Administrative expenses		FC 600
	Cash		FC 600

Between themselves

XYZ
A/R (Interco)		¤ 1,700
	Revenue (Interco)		¤ 1,700
COS (Interco)		¤ 750
	Inventory		¤ 750

ABC
Inventory		FC 2,125
	A/P (Interco)		FC 2,125

As transactions between XYZ and ABC occurred, they were eliminated.

A discussion of how the eliminations were determined is provided on this page along with additional illustrations.

	XYZ (¤)	ABC (FC)	FX rate	ABC (¤)		XYZ / ABC (¤)
Revenue	(¤ 40,000)	(FC 6,000)	1.20	(¤ 5,000)		(¤ 45,000)
Revenue (InterCo)	(¤ 1,700)		1.20		¤ 1,700
Cost of sales	¤ 20,000	FC 3,000	1.20	¤ 2,500		¤ 22,500
COS (InterCo)	¤ 750		1.20		(¤ 750)
Gross profit	(20,950.00)	(FC 3,000)	1.20	(¤ 2,500)		(¤ 22,500)
Administrative expenses	¤ 5,000	FC 600	1.20	¤ 500		¤ 5,500
Net income	(15,950.00)	(FC 2,400)	1.20	(¤ 2,000)		(¤ 17,000)
OCI			1.20	(¤ 952)		(¤ 952)
Comprehensive income	(¤ 15,950)	(2,400.00)	1.20	(¤ 2,952)		(¤ 17,952)

Cash	¤ 2,000	FC 5,275	1.19	¤ 4,433		¤ 6,433
Receivables	¤ 7,000		1.19			¤ 7,000
A/R (InterCo)	¤ 1,700		1.19		(¤ 1,700)
Inventory	¤ 5,500	FC 75	1.19	¤ 63		¤ 5,563
Inventory (InterCo XYZ)	(¤ 750)				¤ 750
Inventory (InterCo ABC)		FC 2,125	1.19	¤ 1,786	(¤ 1,786)
Accruals	¤ 1,000		1.19			¤ 1,000
Current assets	¤ 16,450	FC 7,475	1.19	FC 6,282		FC 19,996
Financial assets: Investments	¤ 30,000		1.19			¤ 30,000
Financial assets: InterCo: Equity: ABC	¤ 10,000		1.19		(¤ 10,000)	¤ 10,000
Property plant and equipment	¤ 35,000	FC 6,600	1.19	¤ 5,546		¤ 40,546
Intangible assets	¤ 30,000	FC 3,600	1.19	¤ 3,025		¤ 33,025
Total assets	¤ 121,450	FC 17,675		FC 14,853		FC 123,567

Payables	(¤ 5,000)		1.19			(¤ 5,000)
A/P (InterCo)		(FC 2,125)	1.19	(¤ 1,786)	¤ 1,786
Loans	(¤ 20,000)		1.19			(¤ 20,000)
Total Liabilities	(FC 25,000)	(FC 2,125)	1.19	(FC 1,786)		(FC 25,000)
Paid in capital	(¤ 50,000)	(FC 12,000)	1.20	(¤ 10,000)	¤ 10,000	(¤ 60,000)
Retained earnings	(¤ 46,450)	(FC 3,550)		(FC 2,920)		(¤ 48,420)
Accumulated OCI				(¤ 147)		(¤ 147)
Total equity	(¤ 96,450)	(FC 15,550)		(¤ 13,067)		(¤ 98,567)
Liabilities and equity	(¤ 121,450)	(FC 17,675)		(¤ 14,853)		(¤ 123,567)

As outlined in IFRS 21.39.a, assets and liabilities are translated using the ex-rate on the balance sheet date. While not identical, ASC 830-30-45-3 provides comparable guidance.

As outlined in IFRS 21.39.b, income and expenses are translated at the exchange rates at the dates of the transactions.

However, IFRS 21.40 also states (edited): For practical reasons, ... an average rate for the period is often used...

While ASC 830-30-45 does not include a similar practical expedient, ASC 830-10-55-10 does allow the use of averages, so the overall guidance is comparable.

Note: these expedients can only be used if they do not lead to material differences.

Also note: companies applying a transaction date method invariably use software designed to automate this process. Consequently, an illustration of how this would be done is not necessary.

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