Foreign Currency Translation

“Foreign currency translation” is an area that becomes relevant to multinational companies. Currency translation methods are subject to U.S. Generally Accepted Accounting Principles (GAAP) when an MNC based in the United States owns more than 50% of the voting stock of a foreign company. In such a case, the parent corporation is responsible for preparing consolidated financial statements. In order to do this, the foreign accounts must be translated from the foreign currency to the domestic unit of currency.

There are 3 steps, which must be followed in the listed order:

1) Identify 3 currencies.

   i)   Currency of books and records (CBR) - currency in which the foreign entity's financial statements are denominated.
   ii)  Functional currency (FC) - currency in which the foreign subsidiary generally conducts its business vendors, 
        customers, creditors etc.)
   iii) Reporting currency (RC) - currency in which the parent company presents or will preent its [[consolidated 
        financial statement|consolidated financial statements]].

2) Identify the appropriate approach to currency translation (3 approaches – current method/temporal method/combination of both).

   i)   If the FC is hyperinflationary, the functional currency is discarded. Instead, estimate the CBR in 
        RC terms using the temporal rate method, which is based on historical currency rates. 
   ii)  Do the same if the CBR is different than the FC.
   iii) Use the current method to translate the FC into the RC.

Thus if the subsidiary’s environment is hyperinflationary, begin with 2.i). If not, go directly to 2.ii) and finish with 2.iii). If the environment is not hyperinflationary and the CBR is the same as the FC, go directly to 2.iii).

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