Summary of ASPE Foreign Currency Translation

Size: px

Start display at page:

Download "Summary of ASPE Foreign Currency Translation"

Milo Gordon Malone
6 years ago
Views:

1 Summary of ASPE Foreign Currency Translation

incorporation in the financial statements of a reporting enterprise.

2 Purpose and Scope This Section establishes standards for the translation of: Transactions of a reporting enterprise that are denominated in a foreign currency (foreign currency transactions); and Financial statements of a foreign operation for incorporation in the financial statements of a reporting enterprise. Definitions Foreign currency transactions - are transactions of the reporting enterprise whose terms are denominated in a currency other than its reporting currency. Foreign Operations & Reporting Enterprises 2

3 Foreign Currency Transactions and Integrated Foreign Operations Foreign currency transactions and related financial statement items of the reporting enterprise Financial Statement Item At transaction date: Assets/liabilities/revenue/expense arising from a foreign currency transaction of the reporting enterprise At balance sheet date: Monetary items Non-monetary items carried at market Dividends Exchange rate used to translate to reporting currency Rate of exchange in effect at transaction date Date of declaration Integrated foreign operations Financial Statement Item Exchange rate used to translate to reporting currency Monetary Items Non-monetary Items Historical rate* Revenues & Expenses associated with monetary items Historical rate ** Revenues & Expenses associated with non-monetary items Historical rate of associated asset* Dividends Date of declaration * Unless the non-monetary items are carried at market value, in which case they should be translated at the current rate. ** ASPE allows the use of weighted averages or other methods of approximation to eliminate unreasonable & burdensome record keeping. Translation rates for the purposes of the tables presented above, the spot (current rate) is the exchange rate in effect at the balance sheet date and the historical rate refers to the exchange rate in effect on the date(s) on which an item is recognized in income during the period. Temporal Method Example Canada Co. is a Canadian based company which manufactures and sells skis and snowboards and has a December 31 year end. Canada Co. has entered into the following foreign currency transactions: In 2008 Canada Co. purchased and paid for a piece of production line equipment from US Innovations Inc. for $300,000 US. At the time the equipment was purchased, the FX rate was $1 US = $1.20 CAD (Canada Co. depreciates it's production line equipment straight line over 5 years, with a 1/2 years amortization taken in the year of acquisition). Production Line Equipment 31 Dec Dec Dec Cost $360,000 $360,000 $360,000 - Depreciation ($36,000) ($72,000) ($72,000) - Accumulated Depreciation ($36,000) ($108,000) ($180,000) - Net Book Value $324,000 $252,000 $180,000 The production line equipment is translated to Canadian dollars at the date of the transactions. Subsequently, the historical exchange rate continues to be used, as the production line equipment is a non-monetary asset. 3

4 In 2009 Canada Co. sold an order of ski's to Copper Mountain (Colorado, USA), for $50,000 US, with payment terms of 1/2 payable on date of sale, and 1/2 payable on March 31, 2010, at the date of sale the FX rate was $1 US = $1.30 CAD, at December 31, 2009 the FX rate was $1 US = $1.05 CAD, at March 31, 2010 the FX rate was $1 US = $1.15 CAD. Date of sale 31 Dec March 2010 Revenue - Sale $50,000 $65,000 Cash - 50% due on date of sale $32,500 Receivable - 50% due at 31 March 2010 $32,500 - Translate 25,000 $1.05 $26,250 - Translate 25,000 $1.15 $28,750 Foreign Exchange Gain/(Loss) - At date of sale - - At year-end/reporting date ($6,250) - At payment date $2,500 The revenue is recorded at the FX rate on the date on which the transaction occurred, the cash received is recorded at its Canadian dollar value on the date received, at period end the outstanding A/R (a monetary asset) is translated at the spot rate with any gain/loss recorded in net income, and when the remaining A/R is settled it is translated at the spot rate with any gain/loss recorded in net income. The overall exchange gain/(loss) on this receivable is a loss of $3,750 which can be calculated as the original amount of $32,500 less the amount owing at payment date of $28,750. Two different amounts are recorded above as the monetary asset is required to be translated at the reporting date. On March 31, 2010 Canada Co. purchased an order of titanium sheets from Michigan Metal Products (Detroit, MI, USA), for $25,000 US, at this time the FX rate was $1US = $1.15 CAD, on June 30, 2010 Canada Co. paid its outstanding payable to Michigan Metal Products when the FX rate was $1 US = $1.20 CAD. Over the next months Canada Co. used the titanium sheets to manufacture snowboards all of which were sold over the course of Oct, Nov and Dec, when the average FX rate was $1 US = $1.30 CAD. 31 March June Dec 2010 Inventory - $25, $28,750 Payable - $25, $28,750 - $25, $30,000 Foreign Exchange Gain/(Loss) - At settlement date ($1,250) Cost of Goods Sold - During Oct/Nov/Dec 2010 $28,750 The raw materials inventory is recorded at the FX rate on the date on which the transaction occurred, the account payable (a monetary liability) is translated at the spot rate with any gain/loss recorded in net income when the liability is settled. When the snowboards are sold the cost of goods sold recognized represents the historical cost of the inventory, as the inventory is a non-monetary asset, further changes in the FX rate after the raw materials are purchased do not affect the cost of inventory or the cost of goods sold expense recorded. 4

5 Self-Sustaining Foreign Operations For self-sustaining foreign operations, the reporting enterprise's exposure to exchange rate changes is limited to its net investment in the foreign operation. The net investment in a self-sustaining foreign operation comprises: the reporting enterprise's proportionate ownership of the foreign operation's net assets (i.e., the amount equivalent to the carrying value of the investment computed as if using the equity method); and any other intercompany balances of a long-term nature that are related to the acquisition or financing of the foreign operation. Exchange gains and losses on intercompany account balances that are not included as part of the net investment are treated in the same manner as those relating to normal foreign currency trade balances, i.e. at the current rate. Financial Statement Item Exchange rate used to translate to reporting currency Assets Liabilities Revenues & expense items (including depreciation and amortization) Historical rate ** Dividends Date of declaration ** ASPE allows the use of weighted averages or other methods of approximation to eliminate unreasonable & burdensome record keeping. Exception - highly inflationary environments When the economic environment of the foreign operation is highly inflationary relative to that of the reporting enterprise, financial statements shall be translated according to the temporal method. Hedge of a net investment in a self-sustaining foreign operation An entity may designate all or a specified percentage of a derivative or a non-derivative financial liability as the hedging item in a hedge of the foreign currency risk in all or a specified percentage of a net investment in a self-sustaining foreign operation (the hedged item). An entity applies hedge accounting to a hedge of the foreign currency risk of a net investment in a self-sustaining foreign operation when and only when: the entity documents that hedge accounting will apply to the specified hedged and hedging items; the currency in which the hedging item is denominated is the same as the currency in which the foreign operation measures its financial results; and foreign currency gains or losses on the hedging item are expected to offset foreign currency gains or losses on the hedged item throughout the term of the hedging relationship. Exchange gains or losses on the hedging item designated shall be offset against the exchange gain or loss on the net investment in the separate component of shareholders' equity. When the economic environment of the foreign operation is highly inflationary relative to that of the reporting enterprise, exchange gains or losses on the hedging item shall be recognized immediately in net income. 5

6 Exchange Gains or Losses Translation of foreign currency transactions & related financial statement items of the reporting enterprise Translation of financial statements of an integrated foreign operation Translation of financial statements of a selfsustaining foreign operation Exchange gains or losses Included in determination of net income for the current period. Included in determination of net income for the current period. Recognized in a separate component of shareholders' equity * *When the economic environment of the foreign operation is highly inflationary relative to that of the reporting enterprise, exchange gains and losses are included in determination of net income for the current period. An appropriate portion of the exchange gains and losses accumulated in the separate component of shareholders' equity shall be included in the determination of net income when there is a reduction in the net investment in a self-sustaining foreign operation. Specific considerations Changes in circumstances relating to foreign operations When there are significant changes in the economic facts and circumstances that require the translation method applied to a particular foreign operation to be changed, the change in method shall be accounted for prospectively. Changing from the Current Rate Method to the Temporal Method When the foreign operation is reclassified from self-sustaining to integrated (or the economic environment of a selfsustaining foreign operation becomes highly inflationary), the temporal method is adopted in place of the current rate method beginning in the period of the change. Exchange gains and losses previously accumulated in a separate component of shareholders' equity continue to be included in shareholders' equity. The translated amounts for non-monetary items at the end of the prior period become the historical basis for those items in the period of the change and subsequent periods. Changing from the Temporal Method to the Current Rate Method When the foreign operation is reclassified from integrated to self-sustaining (or the economic environment of a selfsustaining foreign operation that had been highly inflationary stabilizes), the current rate method is adopted in place of the temporal method beginning in the period of the change. Non-monetary items are translated to the current rate as of the date of the change. The exchange gain or loss attributable to current rate translation of non-monetary items as of the date of the change is included as part of the exchange gains and losses included in a separate component of shareholders' equity. 6

7 Investments accounted for by the equity method The financial statements of a foreign subsidiary, joint venture or investee accounted for by the equity method are first translated into Canadian dollars in accordance with this Section, then the equity method is applied. Transactions and operations of foreign operations that are denominated in another currency Transactions and financial statements that are denominated in the other currency would be translated into the currency of the foreign operation in accordance with this Section. Then the foreign operations own financial statements would be translated and incorporated into the financial statements of the reporting enterprise. Additional Aspects of Translation Elimination of intercompany profits Profits attributable to sales to, or transfers between, companies under common control is required to be eliminated. Since the intercompany profit arises on the date of sale or transfer, the exchange rate in effect on that date is used to compute the amount of intercompany profit to be eliminated. Changes in exchange rates relating to subsequent events that are not connected with the intercompany sale or transfer should not impact the amount of intercompany profits to be eliminated. Differences in dates of financial statements When the date of the financial statements of the foreign operation differs from that of the reporting enterprise, those assets and liabilities that are translated at the current rate would normally be translated at the rate in effect at the balance sheet date of the foreign operation, not at the rate in effect at the balance sheet date of the reporting enterprise. Non-controlling interest The non-controlling interest reported in an enterprise's consolidated financial statements is based on the financial statements of the foreign operation in which there is a non-controlling interest after they have been translated in accordance with this Section. In particular, the non-controlling interest reported includes the non-controlling interest's proportionate share of exchange gains and losses. Preference shares Preference shares of a foreign operation held by the reporting enterprise are translated in the same manner as common shares (i.e., at historical rates) unless redemption is either required or imminent, in which case the current rate is used. Preference shares held by non-controlling shareholders in an integrated foreign operation are also translated at historical rates unless redemption is either required or imminent, in which case the current rate would be used. Preference shares held by non-controlling shareholders in a self-sustaining foreign operation are translated at the current rate (except when the economic environment of a self-sustaining foreign operation is highly inflationary, the preference shares are then translated at the current rate). 7

8 Lower of cost and market When assets are valued at lower of cost and market, a write-down to market may be required in the translated financial statements even though no write-down is required in the foreign currency financial statements. Example (integrated foreign operations) Inventory purchased at a cost of FC 500 when the exchange rate is FC 1 = $2 will have a translated historical cost of $1,000. If, at the balance sheet date, its market amount is FC 600 and the exchange rate is FC 1 = $1.50, the translated market amount of $900 will be less than the translated historical cost of $1,000, and a write-down of inventory in the translated financial statements will be required. On the other hand, it may be necessary to reverse a write-down in the foreign currency financial statements prior to translation if the market amount translated at the current rate exceeds historical cost translated at the historical rates. For example, inventory purchased at a cost of FC 500 when the exchange rate is FC 1 = $3 will have a translated cost of $1,500. If, at the balance sheet date, its market amount is FC 400 and the exchange rate is FC 1 = $4, the translated market amount of $1,600 will exceed the translated historical cost of $1,500. A reversal of the write-down of the foreign currency amount of the inventory will therefore be made prior to translation; the foreign currency cost would then be translated at the historical rate. Once the asset has been written down to market in the translated financial statements, that dollar amount continues to be the carrying amount in the translated financial statements until the asset is sold or a further write-down is necessary. Cash flow statement Cash from operations is translated at the exchange rate at which the respective items are translated for income statement purposes. Other items are translated at the exchange rates in effect when the related transactions took place. The effect of subsequent exchange rate changes on the cash flows during the period and on cash and cash equivalents at the commencement of the period are disclosed, so that cash and cash equivalents at the end of the period are translated at the exchange rate in effect on that date. Disclosure The amount of an exchange gain or loss included in net income shall be disclosed. An entity may exclude from this amount those exchange gains or losses arising on investments in equity securities that are measured at fair value in accordance with ASPE Section 3856 Financial Instruments. When a change is made in the translation method applied to a particular foreign operation, disclosure shall be made of the reasons for the change. 8

ABOUT MNP MNP is one of the largest chartered accountancy and business consulting firms in Canada, with offices in urban and rural centres across the country positioned

Working with local team members, you have access to our national network of professionals as well as strategic local insight to help you meet the challenges you face

Organised as an international not-for-profit entity under Belgium law, Praxity has its administrative office in London.

9 ABOUT MNP MNP is one of the largest chartered accountancy and business consulting firms in Canada, with offices in urban and rural centres across the country positioned to serve you better. Working with local team members, you have access to our national network of professionals as well as strategic local insight to help you meet the challenges you face every day and realize what s possible. Visit us at MNP.ca Praxity, AISBL, is a global alliance of independent firms. Organised as an international not-for-profit entity under Belgium law, Praxity has its administrative office in London. As an alliance, Praxity does not practice the profession of public accountancy or provide audit, tax, consulting or other professional services of any type to third parties. The alliance does not constitute a joint venture, partnership or network between participating firms. Because the alliance firms are independent, Praxity does not guarantee the services or the quality of services provided by participating firms.

ISSUED. December December September ISSUED. September

ISSUED. December December September ISSUED. September New and Proposed Changes to ASPE Sections for the Two Years Ended NEW AND AMENDED STANDARDS 2015 Improvements to Accounting Standards for Private Enterprises (Amendment) 2017 Annual Improvements to Accounting