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,
pertukatan a currency into another currency.
3.
Present exchange rate,
exchange rate prevailing on the date of the relevant financial statements.
4.
Discount, while the
subsequent exchange rate lower than current levels.
5.
Net asset position at risk, as measured
in excess of assets or denominated in foreign currencies and translated at the
exchange rate of duty is now measured or denominated in foreign currencies and
translated at the exchange rate now.
6.
Foreign currency, a
currency other than the currency used by a State, a currency other than the
reporting currency used by the company.
7.
Financial statements in foreign currencies, the financial statements using foreign currency as the unit
of measurement.
8.
Foreign currency transactions, the transaction (ie sale or purchase of goods or services,
or debt loans or accounts receivable) under the conditions stated in currencies
other than the functional currency of the company.
9.
Foreign currency translation, the process to declare the amounts denominated or measured
in one currency into another currency using the exchange rate between two
currencies.
10. Foreign operation, an operation that produces financial statements that (1)
combined or consolidated or accounted for under the equity method in reporting
the company's financial statements and (2) arranged in foreign currencies other
than the reporting currency of the reporting enterprise.
11. Forward exchange
contacts, an agreement to exchange
currencies of different countries by using a specific rate (forward rate) at a
given date in the future.
12. Functional
currency, the currency used by suatau yanga
major companies in the course of business, and in generating or using cash.
13. Historical
exchange rate, exchange rate of
foreign currency that is used when an asset or liability denominated in foreign
currencies bought or going.
14. Local currency, the currency of a State that is used; the reporting
currency used by a domestic or foreign operations.
15. Items of monetary
policy, the obligation to pay or the right
to receive a unit of currency in a fixed value in the future.
16. Reporting currency, the currency used in preparing the company financial
statements.
17. Completion date, the date when the debt is paid by an uncollectible
receivables.
18. Spot exchange rate, exchange rate for currency exchange in the time
immediately.
19. Date of the
transaction, the date when a
transaction is recorded in the accounting records of the reporting company.
20. Translation
adjustments, adjustments arising
from the translation of financial statements of a company's functional currency
into the reporting currency.
21. Unit of
measurement, the currency used to
measure the assets, liabilities, revenues and expenses.
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. Bermaun translational crucible.
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. Bermaun translational crucible.
Translation is a translation process programming
language (source code) to make a fileor other form
of display. Transalai process includes the terms: Compile, Interpret, andLink. Computer application
programs (software) which is developed can be in threeforms:
1. Source-code
2. Intermediate-code
3. The executable code
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
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 executablecode:
Translational approach in the form of computer program source-code into executablecode:
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 isinterpret (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 compiledas
well (no file output). The word 'compile' is used as
a term that generates the output filetranslation. 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 wordso carelessly, it could mean anything.
C. DIFFERENCE OF
PROFITS AND FOREIGN CURRENCY TRANSLATION
If the point of
view of local currency to be used (local companies viewpoint), the
entry ofthe translation adjustment in current earnings do
not need to be done. Enter translationgains and losses in earnings will distort the
real financial relationships and can misleadthe 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 torecognize 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 foreigninvestment in domestic
currency and should be recognized.
D. BENEFITS AND FOREIGN
CURRENCY TRANSLATION
1) Suspension
Changes in the value of domestic currency equivalent of the
net assets of foreignsubsidiaries are not realized and no
effect on the local currency cash flows generatedfrom foreign entities. Translation adjustment should be
accumulated separately as part ofconsolidated equity.
2) Suspension and Amortization
Suspension of translation gains or losses and to amortize it over the useful adjustmentitems related to the balance sheet, primarily related to debt ditangguha = kandan will be amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized during the remainder of the loan as an adjustment to interest expense.
Suspension of translation gains or losses and to amortize it over the useful adjustmentitems related to the balance sheet, primarily related to debt ditangguha = kandan will be amortized over the related fixed assets, which is charged against earnings in the same way with the burden of depreciation or deferred and amortized during the remainder of the loan as an adjustment to interest expense.
3) Partial Suspension
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
Translation gains and losses is to recognize the losses as soon as possible after it happens, but admitted only after the profits realized, this is simply because it is an advantage, it ignores the changes in exchange rates.
4) Not 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 indomestic currency and should be recognized.
Recognize translation gains and losses in the income statement as soon as possible.However, inserting translation gains and losses in the current year's profit will introduce a random element in the profits that may result in significant fluctuations in earnings in case of exchange rate changes
Translation gains and losses reflect the increase or decrease in equity investments indomestic 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 terrnyata is an exception. That this trend will
continue to be supported by such developments as the collapse of the dominance
of the dollar, the currency rate movements are approved by the government, and
the globalization of world capital markets, which have increased the importance
of reporting and financial disclosure. Such developments have profoundly
increased interest ¬ executive-financial executives, accountants, and financial
community on the importance and economic consequences of foreign currency
translation. Let us look at the nature and development of international
accounting puzzle 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-Nonkini
Based on the Method of
Non-Now-Now, lancer current assets and liabilities of foreign subsidiaries are
translated into the reporting currency of its parent company based on the
exchange now. Assets and liabilities are translated lancer historical
rates of exchange. Items of income statement (except for depreciation and
amortization) are translated based on the average rate prevailing in each month
of operation, or based on a weighted average over the entire reporting period. Depreciation
and amortization are translated based on the historical exchange rate recorded
saaat assets acquired.
However, this method
does not consider the economic element. Using year-end exchange rate to
translate the lancer assets implies that cash, receivables, and inventory in
foreign currencies are equally at risk of exchange rate.
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 orpresent 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. Inthis
situation should be selected some existing exchange
rate. Some suggestedalternatives are:
1. Currency dividend payment
2. Free market rate, and
3. Exchange rate penalty or preferences that
can be used, such as those involved inimport export activities.
G. RELATIONS WITH
FOREIGN CURRENCY TRANSLATION INFLATION
The use of the exchange rate is now to
translate the cost of non-monetary assets are located in berinflasi environment
will ultimately lead to an equivalent value in domestic currency is much lower
than the initial baseline measurement. At the same time, earnings will be
much larger translated with respect to load depresisasi which is also lower. The
translation as it can be more easily mislead readers as to give information to
the reader.Assessment of the lower dollar typically lower earnings power akutal
of foreign assets which are supported by local inflation and the ratio of
return on investment that affected inflation in a foreign operation may create
false expectations on future profits.
FASB rejected before the inflation
adjustment process of translation, because the adjustment is not inconsistent
with the historical cost basis of the assessment framework used in the basic
financial statements in the U.S.. As a solution FAS No. 52 requires the use
of the U.S. dollar as the functional currency for those residing overseas
operations with hyperinflation environment. This procedure will maintain a
constant value of the dollar equivalent of foreign currency assets, because
these assets will be translated according to the historical rate. The
imposition of losses on fixed assets in the translation of foreign currency to
equity shareholders will cause a significant effect on financial ratios. Foreign
currency translation problem can not be separated from the problem of
accounting for foreign inflation.
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