FOREIGN CURRENCY TRANSLATION
A. DIFFERENCES BETWEEN TRANSLATION AND FOREIGN CURRENCY CONVERSION
Translation is
not equal to the conversion. Translation is just a change of monetary units, as
well as a balance sheet presented are expressed in British pounds back into the
U.S. dollar equivalent value. There is no physical exchange that occurred, and
no related transactions that have occurred as it carried out the conversion.
Balances in foreign currencies are translated into
domestic currency equivalent value based on the foreign exchange rate is the
price of one unit of a currency expressed in another currency. State's major
trading currencies are bought and sold in global markets. With linked via a
sophisticated telecommunications network, market participants include banks and
other currency intermediaries, businesses, individuals and professional
traders. By providing a place for the buyer and the seller's currency, the
foreign exchange market to facilitate the international transfer payments (eg,
from importers to exporters), allow for international sale or purchase on
credit (eg, a bank letter of credit that allows the goods delivered to the
buyer unknown prior to payment), and providing tools for individuals or businesses
to protect themselves from the risk of the currency is unstable.
Foreign currency transactions occur on the spot
market, forward, or swap. Currency bought or sold on the spot generally must be
sent as soon as possible, ie within 2 working days. Spot market exchange rate
is influenced by many factors, including differences in inflation rates between
countries, differences in national interest and expectations of the future
exchange rate. Transaction on forward markets is an agreement to exchange one
currency for a certain amount into another currency at a future date.
Quotations on forward markets is expressed by the discount or premium of the
spot rate.
Swap transaction involves the purchase of spot and
forward sales or spot sales or purchases forward, on a currency simultaneously.
Investors often make use of swap transactions to take advantage of interest
rates higher in a foreign country, the same opportunity to protect themselves
against unfavorable movements of the exchange rate of foreign exchange.
B. TERMS IN FOREIGN CURRENCY TRANSLATION
1.
Conversion, an exchange of one currency into another currency.
2. Exchange rate now, the exchange
rate prevailing on the date of the relevant financial statements.
3. Net asset position at risk, the
excess assets are measured or denominated in foreign currency and in
translasikan at the exchange rate of duty is now measured or denominated in
foreign currencies and translated at the exchange rate now.
4. Exchange forward contracts, an
agreement to exchange currencies of different countries by using a specific
rate (forward rate) at a given date in the future.
5. Functional currency, is the main
currency used by a company in the conduct of business activities. Usually such
currency is the currency. Countries where the company was located.
6. Historical exchange rate, the
exchange value of foreign currency that is used when an asset or liability
denominated in foreign currencies bought or going.
7. Reporting currency, the currency
used in preparing the company financial statements.
8. Spot exchange rate, the exchange
rate for currency exchange in the time immediately.
9. Translation adjustments, the
adjustments arising from the translation of financial statements of a company's
functional currency into the reporting currency.
Glossary of foreign currency translation, adapted
from GAAP (SFAS) No.52, 1981.
1. Attributes, quantitative
characteristics of an item being measured for accounting purposes. Example,
historical cost and replacement cost which is an attribute of an asset.
2. Conversion, exchange a currency into
another currency.
3. Present exchange rate,
exchange rate prevailing on the date of the relevant financial statements.
4. Discount, while the
subsequent exchange rate lower than current levels.
5. Net asset position at risk, as
measured in excess of assets or denominated in foreign currencies and
translated at the exchange rate of duty is now measured or denominated in
foreign currencies and translated at the exchange rate now.
6. Foreign currency, a
currency other than the currency used by a State, a currency other than the
reporting currency used by the company.
7. Financial statements in foreign
currencies, the financial statements using foreign currency as the
unit of measurement.
8. Foreign currency transactions, the transaction
(ie sale or purchase of goods or services, or debt loans or accounts
receivable) under the conditions stated in currencies other than the functional
currency of the company.
9. Foreign currency translation, the
process to declare the amounts denominated or measured in one currency into
another currency using the exchange rate between two currencies.
10. Foreign operation, an
operation that produces financial statements that (1) combined or consolidated
or accounted for under the equity method in reporting the company's financial
statements and (2) arranged in foreign currencies other than the reporting
currency of the reporting enterprise.
11. Forward exchange contacts, an
agreement to exchange currencies of different countries by using a specific
rate (forward rate) at a given date in the future.
12. Functional currency, the
currency used by suatau yanga major companies in the course of business, and in
generating or using cash.
13. Historical exchange rate,
exchange rate of foreign currency that is used when an asset or liability
denominated in foreign currencies bought or going.
14. Local currency, the currency
of a State that is used; the reporting currency used by a domestic or foreign
operations.
15. Items of monetary policy, the
obligation to pay or the right to receive a unit of currency in a fixed value
in the future.
16. Reporting currency, the
currency used in preparing the company financial statements.
17. Completion date, the
date when the debt is paid by an uncollectible receivables.
18. Spot exchange rate,
exchange rate for currency exchange in the time immediately.
19. Date of the transaction, the
date when a transaction is recorded in the accounting records of the reporting
company.
20. Translation adjustments,
adjustments arising from the translation of financial statements of a company's
functional currency into the reporting currency.
21. Unit of measurement, the
currency used to measure the assets, liabilities, revenues and expenses.
Translation is
the translation of foreign currency. Translation is a foreign exchange
(governed by the IAD 21):
a. Translation occurs when the subsidiary company has been significant, and
there is MNC (Multy National Corporete).
b. Translational change in different units into units of money.
c. Exchange rate plays
Translation is a translation process programming
language (source code) to make a file or other form of display. Translation process
includes the terms: Compile, Interpret, and Link. Computer application programs
(software) which is developed can be in three forms:
1. Source-code
2. Intermediate-code
3. The executable code
There is
a two stage process of translation:
1. Translation of
the source-code to the intermediate-code
2. Translation of the intermediate-code into executable code
Variations
Translation Approach
Translational approach in the form of computer program source-code into
executable code:
a) Full-interpretation. Translation
of the source-code directly into executable code by using the stage sat alone.
b) Mixed. Translation of the
source-code to the intermediate-code is compiled (generated output file).
Translation of the intermediate-code into executable code is interpret (not
generated output file).
c) Full-compilation. Translation of
the source-code to the intermediate-code is compiled (no file output).
Translation of the intermediate-code into executable code to be compiled as
well (no file output). The word 'compile' is used as a term that generates the
output file translation. Henceforth, the word compile meaningful 'translation
of the source-code to the intermediate-code (which generates an output file).
In practice, the use of this word so carelessly, it could mean anything.
C. DIFFERENCE OF PROFITS AND LOSSES
FOREIGN CURRENCY TRANSLATION
If the point of view of local currency to be used
(local companies viewpoint), the entry of the translation adjustment in current
earnings do not need to be done. Enter translation gains and losses in earnings
will distort the real financial relationships and can mislead the users of such
information. Translation gains or losses should be treated from the standpoint
of local currency as an adjustment to equity owners.
If the parent company's reporting currency is the
unit of measurement of the financial statements are translated (the parent
company's point of view), it is advisable to recognize gain or loss on
translation of profit as soon as possible. Point of view of the parent company
saw overseas subsidiaries as an extension of its parent company. Translation
gains and losses reflect the increase or decrease in equity of foreign investment
in domestic currency and should be recognized.
D. BENEFITS AND LOSSES FOREIGN
CURRENCY TRANSLATION
1) Suspension
Changes in the value of domestic currency equivalent
of the net assets of foreign subsidiaries are not realized and no effect on the
local currency cash flows generated from foreign entities. Translation
adjustment should be accumulated separately as part of consolidated equity.
2) Suspension and Amortization
Suspension of translation gains or losses and to
amortize it over the useful adjustment items related to the balance sheet,
primarily related to debt suspended and will be amortized over the related fixed assets,
which is charged against earnings in the same way with the burden of
depreciation or deferred and amortized during the remainder of the loan as an
adjustment to interest expense.
3) Partial Suspension
Translation gains and losses is to recognize the
losses as soon as possible after it happens, but admitted only after the
profits realized, this is simply because it is an advantage, it ignores the
changes in exchange rates.
4) Not be suspended
Recognize translation gains and losses in the income
statement as soon as possible. However, inserting translation gains and losses
in the current year's profit will introduce a random element in the profits
that may result in significant fluctuations in earnings in case of exchange
rate changes
Translation gains and losses reflect the increase or
decrease in equity investments in domestic currency and should be recognized.
E. EFFECT OF VARIOUS METHODS OF FOREIGN CURRENCY
TRANSLATION FINANCIAL STATEMENTS
Although most of
the technical issues in accounting tends to resolve itself over time, foreign
currency translation turned
out to be an exception. That this trend will continue to be
supported by such developments as the collapse of the dominance of the dollar,
the currency rate movements are approved by the government, and the
globalization of world capital markets, which have increased the importance of
reporting and financial disclosure. Such developments have profoundly increased
interest ¬ executive-financial executives, accountants, and financial community
on the importance and economic consequences of foreign currency translation.
Let us look at the nature and development of international accounting puzzle
is.
¥ Single
Rate Method
Based on this
translational approach, the financial statements of foreign operations, which
are considered by the parent company as an autonomous entity, has the reporting
of their own domicile. This is a local accounting environment where foreign
affiliates are mentraksaksikan his business affairs. To maintain the
"flavor" of the local currency reports, a way must be found so that
translation can be implemented with minimal distortion. The best way is the use
of the method of exchange rate policies.
Since all financial reports of foreign exchange is
actually multiplied by a konstansta, this translation method to maintain its
financial results and the original relation (eg financial ratios) in the consolidated
statements of individual entities that are consolidated. Only the form of
overseas estimates, not the essence, the change in the method of exchange rate
policies.
Although interesting and conceptually simple, the
method of exchange rate policies were blamed by some people because it
undermines the basic purpose of the consolidated financial statements, that is
because it presents, for the benefit of shareholders of the parent company,
operating results and financial position of the parent company and firms from
the perspective of children the single currency. maintain the parent company's
reporting currency as the unit of measurement.
In the prevailing exchange rate method, the results
will reflect the consolidation of perspekfif-exchange perspective of each
country where companies are children. For example, if an asset dip = roleh an
overseas subsidiary company for when the rate was 1.000 VA VA 1 = $ 1, then
from the perspective of historical cost dollars is $ 1,000; from the
perspective of local currency is also $ 1000. If the exchange rate changed to
VA 5 = $ 1, the historical cost of those assets from the perspective of the
dollar (translas' historical cost) remains $ 1,000. If the local currency will
be retained as the unit of measurement, will be expressed nifai assets of $ 200
(exchange rate translation effect).
Rate method applies also to blame because it assumes
that all assets are influenced by local-currency exchange rate risk (ie,
assuming that the fluctuations in the domestic currency equivalent, which is
caused by fluctuations translational running, an indicator of changes in the
intrinsic value of those assets). Hat is rarely true because the value of
inventory and fixed assets in foreign countries are generally supported by
local inflation.
¥
Multiple Rate Methods
Methods of combining multiple exchange rate exchange
rate historically runs and in the process of translation. 3 Such methods are
discussed below.
Force-historical method. Based on the
true-historical approach, which is popular in the U.S. and other places before
the year 1976, current assets and current liabilities of a subsidiary abroad
are translated into the reporting currency using the exchange rate of its
parent company applies. Assets and liabilities are non-smooth translated with
historical rates.
Items of income statement, except for depreciation and amortization, are
translated at the exchange rate on average each month of operation or on the
basis of the weighted average of the entire period to be reported. Depreciation
and amortization are translated using historical exchange rates prevailing at
the time of the relevant asset is obtained.
This methodology is, unfortunately, has some drawbacks. For example, this
method is less choose a conceptual justification. Existing definitions of
assets and liabilities and non-current classification does not explain why such
a manner which will determine the exchange rate used in the process transiasi.
Monetary-nonmonetary method. As with any true-historical method, the method moniter
using pattern-classification of non-monetary balance sheet to determine the
exchange rate translation of monetary items tepat.Karena settled in cash; use
of exchange applicable to translate the items of foreign exchange domestic
currency equivalent yield that reflects the realizable value or value of the
solution.
Temporal method according to the temporal
approach, translational currency conversion is a process of measurement
(ie, repeated presentation of a particular value). Therefore, this method can
not be used to change the attributes of an item that is being measured; this
method can only change the unit of measurement. Balance of foreign currency
translation, for example, just change the (restate) the denomination of
inventory. not the actual assessment. In U.S. GAAP, assets are measured based
on jumiah cash on hand at the balance sheet date. Receivables and payables
expressed in a number expected to be received or paid at maturity. Liabilities
and other assets are measured at the prevailing price when the item is acquired
or item ¬ occurs (historical price). Even so, some of which are measured by the
prices prevailing at the date of financial statements (the price goes), such as
inventory under the rules of cost or market. In short, there is a dimension of
time associated with the values of this money.
By Lorensen, the best way to maintain accounting bases are used to measure
these items is to translate the foreign currency amount of foreign currency at
the exchange rate prevailing on the date of the measurement of foreign currency
takes place. Temporal principle thus stated that
cash, receivables, and payables are measured at the promised amount should be
translated using the exchange rates prevailing at balance sheet date. Assets
and liabilities are measured at the price of money should be translated using
the exchange rates prevailing on the date with respect to the price of money.
F. METHOD OF EVALUATION AND SELECTION OF FOREIGN CURRENCY
TRANSLATION
Translation
methods can be classified into two types of methods that use a single exchange
rate for the present re-translation of foreign currency balances to the
equivalent value in domestic currency or a method that uses a variety of rates.
1.
Methods Single Currency
This method has long been popular in Europe,
applying the exchange rate, the current exchange rate and the closing exchange
rate, for all assets and liabilities lancer. Revenues and expenses denominated
in foreign currencies are generally translated using the exchange rate prevailing
at the time the posts are recognized. However, to facilitate these items are
generally translated using the weighted average exchange rates are appropriate
for the period. The financial statements of a foreign operation has its own
reporting domicile, local currency environment in which the foreign affiliate
companies do business. An asset or liability denominated in foreign currency is
said to face foreign exchange risk if the equivalent in the currency used to
translate the asset or liability.
2. Multiple methods of exchange rate
The method combines Multiple Currency exchange rate
exchange rate historically and now in the process of translation.
3. Now the method-Non now
Based on the Method of Non-Now-Now, lancer current
assets and liabilities of foreign subsidiaries are translated into the
reporting currency of its parent company based on the exchange now. Assets and
liabilities are translated lancer historical rates of exchange. Items of income
statement (except for depreciation and amortization) are translated based on
the average rate prevailing in each month of operation, or based on a weighted
average over the entire reporting period. Depreciation and amortization are
translated based on the historical exchange rate recorded saaat assets acquired.
However, this method does not consider the economic
element. Using year-end exchange rate to translate the lancer assets implies
that cash, receivables, and inventory in foreign currencies are equally at risk
of exchange rate.
4. Monetary-nonmonetary method
Non-monetary method Monetary also use the balance
sheet classification scheme fatherly determine the appropriate exchange rate
translation. Monetary assets and liabilities are translated based on the
exchange rate now. Items of non-monetary assets, long-term investment, and
stock investors are translated using historical exchange rates. Items of income
statements are translated using a procedure similar to that described for the
concept of non-present now.
5. Temporal method
By using the temporal method, tranlasi currency
conversion is a process of re-measurement or presentation of a certain value.
This method does not change the attributes of an item being measured, but only
change the unit of measurement. Translation of these balances in foreign currency-denominated
causes repeated measurements such items but not the actual assessment. Under
U.S. GAAP, measured by the amount of cash on hand at the balance sheet date.
Receivables and liabilities are stated at amounts expected to be received or
paid at maturity.
Under the temporal method, monetary items such as
cash, receivables, and liabilities are translated based on the exchange now.
Such items are translated at the exchange rate of monetary base that maintains
in the first measurement. In particular, the value of assets in foreign
currencies are reported at historical cost, are translated based on the
historical exchange rate. This is because historical cost in foreign currencies
are translated at the exchange rate exchange rate historically produces
historical cost in domestic currency.
These four methods discussed at one time been used
in the United States and can be found even today in many countries. In general,
these methods lead to the translation of foreign currency which is quite
different. The first three methods (method of exchange rate now, the method
now-non-date, and method-monetary non-monetary) are used in the identification
of assets and liabilities which are at risk or may be protected from foreign
exchange risk. Then, the translation method applied consistently by taking into
account these differences.
EXCHANGE RIGHT NOW
So far this term the exchange rate used in
translation method refers to the historical or present exchange rate. The
average rate is often used in the income statement for the posts load. Some
countries use the exchange rate is different for different transactions. In
this situation should be selected some existing exchange rate. Some suggested
alternatives are:
1. Currency
dividend payment
2. Free market rate, and
3. Exchange rate penalty or preferences that can be used, such as those
involved in import export activities.