ASC

ASC 830-10

Overall

830 Foreign Currency Matters

Download JSONDownload Markdown58 paragraphs · 7 sectionsJump to summary

Source downloaded: .Record version df02e5d4ef40. Effective date must be checked in the source.

In brief

IntermediateForeign currencySubsequent measurementConsolidationFinancial statement presentation

ASC 830-10 sets the scope and foundational framework for foreign currency accounting: it requires each foreign entity's assets, liabilities, and operations to be measured in that entity's functional currency—the currency of the primary economic environment in which it operates (830-10-45-2)—before amounts are translated into the reporting currency. It supplies the economic indicators (cash flow, sales price, sales market, expense, financing, and intra-entity indicators in 830-10-55-5) that management weighs to identify the functional currency, mandates remeasurement of books of record not kept in the functional currency using historical rates for specified nonmonetary items (830-10-45-17 through 45-18), and requires entities in highly inflationary economies (cumulative 3-year inflation ≈100% or more) to be remeasured as if the reporting currency were the functional currency (830-10-45-11).

Key points (7)
  • The Topic applies to all entities, to all foreign currency transactions, and to all foreign currency statements incorporated by consolidation, combination, or the equity method; convenience translations for readers are outside its scope (830-10-15-2 through 15-7).
  • Translation must both reflect the expected economic effects of rate changes on the reporting entity's cash flows and equity and preserve the results and relationships measured in each entity's functional currency under U.S. GAAP (830-10-10-2).
  • The functional currency is the currency of the primary economic environment in which the entity primarily generates and expends cash; it is a matter of fact requiring management judgment weighing cash flow, sales price, sales market, expense, financing, and intra-entity indicators (830-10-45-2, 45-6, 830-10-55-5).
  • A single entity with distinct and separable operations in different economic environments may have different functional currencies for each operation (830-10-45-5, 830-10-55-6).
  • Once determined, the functional currency is used consistently unless significant changes in economic facts clearly indicate a change; prior financial statements are never restated, and changes to/from the reporting currency follow 830-10-45-9 and 45-10 (830-10-45-7).
  • Financial statements of a foreign entity in a highly inflationary economy (cumulative inflation of approximately 100% or more over three years) are remeasured as if the functional currency were the reporting currency (830-10-45-11 through 45-13); when the economy ceases to be highly inflationary, reporting currency amounts are translated at the current rate to establish the new functional currency basis for nonmonetary items (830-10-45-15).
  • If books of record are not kept in the functional currency, remeasurement precedes translation: listed nonmonetary items (inventories at cost, PP&E and accumulated depreciation, prepaids, intangibles, goodwill, common stock, related cost of sales, depreciation, amortization) use historical rates, all other items use the current rate, and remeasurement gains and losses on nonfunctional-currency monetary items go to income (830-10-45-17 through 45-18).

For students. Exam questions almost always turn on identifying the functional currency first: get that wrong and every downstream answer (remeasurement gains in income vs. translation adjustments in OCI) is wrong. A common misunderstanding is conflating remeasurement (books not in functional currency; historical rates for nonmonetary items; gains/losses to earnings) with translation into the reporting currency (current rate; adjustment to OCI), and forgetting that a highly inflationary economy forces the reporting currency to be treated as the functional currency.

functional currencyreporting currencyremeasurementtranslationhighly inflationary economymonetary and nonmonetary itemshistorical exchange rateweighted average exchange rate

Machine-generated study aid for ASC 830-10. Check the source paragraphs below.

830-10-00Status

Source downloaded: .Record version e0e0c15e0652. Effective date must be checked in the source.

830-10-05Overview and Background

Source downloaded: .Record version 9829791515c3. Effective date must be checked in the source.

830-10-05-1
The Foreign Currency Matters Topic provides guidance on foreign currency transactions and translation of financial statements. This Topic includes the following Subtopics:
  1. a
    Overall
  2. b
    Foreign Currency Transactions
  3. c
    Translation of Financial Statements
  4. d
    Statement of Cash Flows
  5. e
    Income Taxes.

830-10-10Objectives

Source downloaded: .Record version f66fe3d1b82e. Effective date must be checked in the source.

Objectives of Translation

830-10-10-1
Financial statements are intended to present information in financial terms about the performance, financial position, and cash flows of a reporting entity. For this purpose, the financial statements of separate entities within a reporting entity, which may exist and operate in different economic and currency environments, are consolidated and presented as though they were the financial statements of a single reporting entity. Because it is not possible to combine, add, or subtract measurements expressed in different currencies, it is necessary to translate into a single reporting currency those assets, liabilities, revenues, expenses, gains, and losses that are measured or denominated in a foreign currency. Paragraph 830-10-55-1 discusses the meaning of measurement in a foreign currency.
830-10-10-2
The unity presented by such translation does not alter the underlying significance of the results and relationships of the constituent parts of the reporting entity. It is only through the effective operation of its constituent parts that the reporting entity as a whole is able to achieve its purpose. Accordingly, the translation of the financial statements of each component entity of a reporting entity should accomplish both of the following objectives:
  1. a
    Provide information that is generally compatible with the expected economic effects of a rate change on a reporting entity's cash flows and equity
  2. b
    Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their functional currencies in conformity with U.S. generally accepted accounting principles (GAAP).

830-10-15Scope and Scope Exceptions

Source downloaded: .Record version 3c1ec5b33c07. Effective date must be checked in the source.

Overall Guidance

830-10-15-1
The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Foreign Currency Matters Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Foreign Currency Matters Topic.

Entities

830-10-15-2
The guidance in the Foreign Currency Matters Topic applies to all entities.

Transactions

830-10-15-3
The guidance in the Foreign Currency Matters Topic applies to all foreign currency transactions in financial statements of a reporting entity and all foreign currency statements that are incorporated in the financial statements of a reporting entity by consolidation, combination, or the equity method of accounting.
830-10-15-4
For convenience, this Topic assumes that the reporting entity uses the U.S. dollar as its reporting currency. However, a currency other than the U.S. dollar may be the reporting currency in financial statements that are prepared in conformity with U.S. generally accepted accounting principles (GAAP). For example, a foreign entity may report in its local currency in conformity with U.S. GAAP. If so, the requirements of this Topic apply.

Other Considerations

830-10-15-5
The functional currency approach applies equally to translation of financial statements of foreign investees whether accounted for by the equity method or consolidated. Therefore, the foreign currency statements and the foreign currency transactions of an investee that are accounted for by the equity method shall be translated in conformity with the requirements of this Topic in applying the equity method.
830-10-15-6
The functional currency approach also applies to translation after a business combination or a combination accounted for by a not-for-profit entity. See paragraph 830-30-45-11 for guidance.
830-10-15-7
Translation of financial statements from one currency to another for purposes other than consolidation, combination, or the equity method is beyond the scope of this Topic. For example, this Topic does not cover translation of the financial statements of a reporting entity from its reporting currency into another currency for the convenience of readers accustomed to that other currency.

830-10-45Other Presentation Matters

Source downloaded: .Record version 15d325c16a58. Effective date must be checked in the source.

830-10-45-1
The guidance in this Section relates to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), remeasures the books of record (if necessary), and characterizes transaction gains and losses. The guidance is organized as follows:
  1. a
    The functional currency
  2. b
    The functional currency in highly inflationary economies
  3. c
    Remeasurement of books of record into the functional currency
  4. d
    Subparagraph superseded by Accounting Standards Update No. 2015-01.

The Functional Currency

830-10-45-2
The assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.
830-10-45-3
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. Arbitrary rules that might dictate the identification of the functional currency in each case would accomplish a degree of superficial uniformity but, in the process, might diminish the relevance and reliability of the resulting information.
830-10-45-4
Multinational reporting entities may consist of entities operating in a number of economic environments and dealing in a number of foreign currencies. All foreign operations are not alike. To fulfill the objectives in paragraph 830-10-10-2, it is necessary to recognize at least two broad classes of foreign operations:
  1. a
    In the first class are foreign operations that are relatively self-contained and integrated within a particular country or economic environment. The day-to-day operations are not dependent on the economic environment of the parent's functional currency; the foreign operation primarily generates and expends foreign currency. The foreign currency net cash flows that it generates may be reinvested or converted and distributed to the parent. For this class, the foreign currency is the functional currency.
  2. b
    In the second class are foreign operations that are primarily a direct and integral component or extension of the parent entity's operations. Significant assets may be acquired from the parent entity or otherwise by expending dollars and, similarly, the sale of assets may generate dollars that are available to the parent. Financing is primarily by the parent or otherwise from dollar sources. In other words, the day-to-day operations are dependent on the economic environment of the parent's currency, and the changes in the foreign entity's individual assets and liabilities impact directly on the cash flows of the parent entity in the parent's currency. For this class, the dollar is the functional currency.
830-10-45-5
An entity might have more than one distinct and separable operation, such as a division or branch, in which case each operation may be considered a separate entity. If those operations are conducted in different economic environments, they might have different functional currencies.
830-10-45-6
The functional currency of an entity is, in principle, a matter of fact. In some cases, the facts will clearly identify the functional currency; in other cases they will not. For example, if a foreign entity conducts significant amounts of business in two or more currencies, the functional currency might not be clearly identifiable. In those instances, the economic facts and circumstances pertaining to a particular foreign operation shall be assessed in relation to the stated objectives for foreign currency translation (see paragraphs
830-10-10-1 through 10-2
). Management's judgment will be required to determine the functional currency in which financial results and relationships are measured with the greatest degree of relevance and reliability.
830-10-45-7
Once the functional currency for a foreign entity is determined, that determination shall be used consistently unless significant changes in economic facts and circumstances indicate clearly that the functional currency has changed. Previously issued financial statements shall not be restated for any change in the functional currency.
830-10-45-8
See paragraph 250-10-45-1 for guidance on adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring. Paragraphs
830-10-45-15 through 45-16
discuss changes related to highly inflationary economies.
830-10-45-9
If the functional currency changes from the reporting currency to a foreign currency, the adjustment attributable to current-rate translation of nonmonetary assets as of the date of the change shall be reported in other comprehensive income.
830-10-45-10
If the functional currency changes from a foreign currency to the reporting currency, translation adjustments for prior periods shall not be removed from equity and the translated amounts for nonmonetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and subsequent periods. This guidance shall be used also to account for a change in functional currency from the foreign currency to the reporting currency when an economy becomes highly inflationary.

The Functional Currency in Highly Inflationary Economies

830-10-45-11
The financial statements of a foreign entity in a highly inflationary economy shall be remeasured as if the functional currency were the reporting currency. Accordingly, the financial statements of those entities shall be remeasured into the reporting currency according to the requirements of paragraph 830-10-45-17. For the purposes of this requirement, a highly inflationary economy is one that has cumulative inflation of approximately 100 percent or more over a 3-year period.
830-10-45-12
The determination of a highly inflationary economy must begin by calculating the cumulative inflation rate for the three years that precede the beginning of the reporting period, including interim reporting periods. If that calculation results in a cumulative inflation rate in excess of 100 percent, the economy shall be considered highly inflationary in all instances. However, if that calculation results in the cumulative rate being less than 100 percent, historical inflation rate trends (increasing or decreasing) and other pertinent economic factors should be considered to determine whether such information suggests that classification of the economy as highly inflationary is appropriate. Projections cannot be used to overcome the presumption that an economy is highly inflationary if the 3-year cumulative rate exceeds 100 percent.
830-10-45-13
The definition of a highly inflationary economy is necessarily an arbitrary decision. In some instances, the trend of inflation might be as important as the absolute rate. The definition of a highly inflationary economy shall be applied with judgment.
830-10-45-14
Example 3 (see paragraph 830-10-55-23) illustrates the application of this guidance.
830-10-45-15
If an entity's subsidiary's functional currency changes from the reporting currency to the local currency because the economy ceases to be considered highly inflationary, the entity shall restate the functional currency accounting bases of nonmonetary assets and liabilities at the date of change as follows:
  1. a
    The reporting currency amounts at the date of change shall be translated into the local currency at current exchange rates.
  2. b
    The translated amounts shall become the new functional currency accounting basis for the nonmonetary assets and liabilities.
Example 1 (see paragraph 830-10-55-12) illustrates the application of this guidance.
830-10-45-16
When the functional currency is the reporting currency, paragraph 740-10-25-3(f) prohibits recognition of deferred tax benefits that result from indexing for tax purposes assets and liabilities that are remeasured into the reporting currency using historical exchange rates. Thus, deferred tax benefits attributable to any such indexing that occurs after the change in functional currency to the reporting currency shall be recognized when realized on the tax return and not before. Deferred tax benefits that were recognized for indexing before the change in functional currency to the reporting currency are eliminated when the related indexed amounts shall be realized as deductions for tax purposes.

Remeasurement of the Books of Record Into the Functional Currency

830-10-45-17
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. The remeasurement of and subsequent accounting for transactions denominated in a currency other than the functional currency shall be in accordance with the requirements of Subtopic 830-20. The remeasurement process is intended to produce the same result as if the entity's books of record had been maintained in the functional currency. To accomplish that result, it is necessary to use historical exchange rates between the functional currency and another currency in the remeasurement process for certain accounts (the current rate will be used for all others), and this guidance identifies those accounts. To accomplish that result, it is also necessary to recognize currently in income all exchange gains and losses from remeasurement of monetary assets and liabilities that are not denominated in the functional currency (for example, assets and liabilities that are not denominated in dollars if the dollar is the functional currency).
830-10-45-18
All of the following are common nonmonetary balance sheet items and related revenue, expense, gain, and loss accounts that shall be remeasured using historical rates to produce the same result in terms of the functional currency that would have occurred if those items had been initially recorded in the functional currency:
  1. a
    Equity securities without readily determinable fair values accounted for in accordance with paragraph 321-10-35-2. The historical rate to be used shall be the exchange rate as of the later of the acquisition date or the most recent date on which the equity security was adjusted to fair value in accordance with paragraphs
    321-10-35-2 through 35-3
    , if applicable.
    1. 1
      Subparagraph superseded by Accounting Standards Update No. 2019-04.
    2. 2
      Subparagraph superseded by Accounting Standards Update No. 2019-04.
  2. b
    Inventories carried at cost
  3. c
    Prepaid expenses such as insurance, advertising, and rent
  4. d
    Property, plant, and equipment
  5. e
    Accumulated depreciation on property, plant, and equipment
  6. f
    Patents, trademarks, licenses, and formulas
  7. g
    Goodwill
  8. h
    Other intangible assets
  9. i
    Deferred charges and credits, except policy acquisition costs for life insurance companies
  10. j
    Deferred income
  11. k
    Common stock
  12. l
    Preferred stock carried at issuance price
  13. m
    Revenues and expenses related to nonmonetary items, for example:
    1. 1
      Cost of goods sold
    2. 2
      Depreciation of property, plant, and equipment
    3. 3
      Amortization of intangible items such as patents, licenses, and so forth
    4. 4
      Amortization of deferred charges or credits except policy acquisition costs for life insurance entities.

830-10-55Implementation Guidance and Illustrations

Source downloaded: .Record version 03fde39898e1. Effective date must be checked in the source.

Implementation Guidance

830-10-55-1
To measure in foreign currency is to quantify an attribute of an item in a unit of currency other than the reporting currency. Assets and liabilities are denominated in a foreign currency if their amounts are fixed in terms of that foreign currency regardless of exchange rate changes. An asset or liability may be both measured and denominated in one currency, or it may be measured in one currency and denominated in another.
830-10-55-2
For example, two foreign branches of a U.S. entity, one Swiss and one German, purchase identical assets on credit from a Swiss vendor at identical prices stated in Swiss francs. The German branch measures the cost (an attribute) of that asset in euros. Although the corresponding liability is also measured in euros, it remains denominated in Swiss francs since the liability must be settled in a specified number of Swiss francs. The Swiss branch measures the asset and liability in Swiss francs. Its liability is both measured and denominated in Swiss francs. Although assets and liabilities can be measured in various currencies, rights to receive or obligations to pay fixed amounts of a currency are, by definition, denominated in that currency.
830-10-55-3
The following provides guidance for determination of the functional currency. The economic factors cited here, and possibly others, should be considered both individually and collectively when determining the functional currency.
830-10-55-4
This general guidance presents indicators of facts to be considered in identifying the functional currency. 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 that most faithfully portrays the economic results of the entity's operations and thereby best achieves the objectives of foreign currency translation set forth in paragraph 830-10-10-2. Management is in the best position to obtain the pertinent facts and weigh their relative importance in determining the functional currency for each operation. 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.
830-10-55-5
The following salient economic factors, and possibly others, should be considered both individually and collectively when determining the functional currency:
  1. a
    Cash flow indicators, for example:
    1. 1
      Foreign currency. Cash flows related to the foreign entity's individual assets and liabilities are primarily in the foreign currency and do not directly affect the parent entity's cash flows.
    2. 2
      Parent's currency. Cash flows related to the foreign entity's individual assets and liabilities directly affect the parent's cash flows currently and are readily available for remittance to the parent entity.
  2. b
    Sales price indicators, for example:
    1. 1
      Foreign currency. Sales prices for the foreign entity's products are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government regulation.
    2. 2
      Parent's currency. Sales prices for the foreign entity's products are primarily responsive on a short-term basis to changes in exchange rates; for example, sales prices are determined more by worldwide competition or by international prices.
  3. c
    Sales market indicators, for example:
    1. 1
      Foreign currency. There is an active local sales market for the foreign entity's products, although there also might be significant amounts of exports.
    2. 2
      Parent's currency. The sales market is mostly in the parent's country or sales contracts are denominated in the parent's currency.
  4. d
    Expense indicators, for example:
    1. 1
      Foreign currency. Labor, materials, and other costs for the foreign entity's products or services are primarily local costs, even though there also might be imports from other countries.
    2. 2
      Parent's currency. Labor, materials, and other costs for the foreign entity's products or services continually are primarily costs for components obtained from the country in which the parent entity is located.
  5. e
    Financing indicators, for example:
    1. 1
      Foreign currency. Financing is primarily denominated in foreign currency, and funds generated by the foreign entity's operations are sufficient to service existing and normally expected debt obligations.
    2. 2
      Parent's Currency—Financing is primarily from the parent or other dollar-denominated obligations, or funds generated by the foreign entity's operations are not sufficient to service existing and normally expected debt obligations without the infusion of additional funds from the parent entity. Infusion of additional funds from the parent entity for expansion is not a factor, provided funds generated by the foreign entity's expanded operations are expected to be sufficient to service that additional financing.
  6. f
    Intra-entity transactions and arrangements indicators, for example:
    1. 1
      Foreign currency. There is a low volume of intra-entity transactions and there is not an extensive interrelationship between the operations of the foreign entity and the parent entity. However, the foreign entity's operations may rely on the parent's or affiliates' competitive advantages, such as patents and trademarks.
    2. 2
      Parent's currency. There is a high volume of intra-entity transactions and there is an extensive interrelationship between the operations of the foreign entity and the parent entity. Additionally, the parent's currency generally would be the functional currency if the foreign entity is a device or shell corporation for holding investments, obligations, intangible assets, and so forth, that could readily be carried on the parent's or an affiliate's books.
830-10-55-6
In some instances, a foreign entity might have more than one distinct and separable operation. For example, a foreign entity might have one operation that sells parent-entity-produced products and another operation that manufactures and sells foreign-entity-produced products. If they are conducted in different economic environments, those two operations might have different functional currencies. Similarly, a single subsidiary of a financial institution might have relatively self-contained and integrated operations in each of several different countries. In those circumstances, each operation may be considered to be an entity as that term is used in this Subtopic, and, based on the facts and circumstances, each operation might have a different functional currency.
830-10-55-7
Foreign investments that are consolidated or accounted for by the equity method are controlled by or subject to significant influence by the parent entity. Likewise, the parent's currency is often used for measurements, assessments, evaluations, projections, and so forth, pertaining to foreign investments as part of the management decision-making process. Such management control, decisions, and resultant actions may reflect, indicate, or create economic facts and circumstances. However, the exercise of significant management control and the use of the parent's currency for decision-making purposes do not determine, per se, that the parent's currency is the functional currency for foreign operations.
830-10-55-8
The guidance on the subsequent measurement of inventory in Subtopic 330-10 requires special application when the books of record are not kept in the functional currency. Inventories carried at cost in the books of record in another currency should be first remeasured to cost in the functional currency using historical exchange rates. Then, historical cost in the functional currency should be evaluated for impairment under the subsequent measurement guidance using the functional currency. Application of the subsequent measurement guidance in functional currency may require a write-down in the functional currency statements even though no write-down has been made in the books of record maintained in another currency. Likewise, a write-down in the books of record may need to be reversed if the application of the subsequent measurement guidance in the functional currency does not require a write-down. If inventory has been written down in the functional currency statements, that functional currency amount shall continue to be the carrying amount in the functional currency financial statements until the inventory is sold or a further write-down is necessary. An asset other than inventory may sometimes be written down from historical cost. Although different measurement guidance may be used to determine that write-down, the approach described in this paragraph might be appropriate. That is, a write-down may be required in the functional currency statements even though not required in the books of record, and a write-down in the books of record may need to be reversed before remeasurement to prevent the remeasured amount from exceeding functional currency historical cost.
830-10-55-9
Literal application of the subsequent measurement guidance in Subtopic 330-10 may require an inventory write-down in functional currency financial statements for locally acquired inventory if the value of the currency in which the books of record are maintained has declined in relation to the functional currency between the date the inventory was acquired and the date of the balance sheet. However, such a write-down may not be necessary, for example, for inventory measured using the first-in, first out (FIFO) methodology, if the net realizable value expressed in the currency in which the books of record are maintained has increased sufficiently so that net realizable value exceeds historical cost as measured in functional currency. Cases A and B in Example 2 (see paragraphs
830-10-55-15 through 55-16
and
830-10-55-18 through 55-19
) illustrate this situation. This paragraph is not intended to preclude recognition of gains in a later interim period to the extent of inventory losses recognized from net realizable value declines in earlier interim periods if losses on the same inventory are recovered in the same year, as provided by paragraph 270-10-45-6(c). An inventory write-down also may be required for imported inventory.
830-10-55-10
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. For example, because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted average exchange rate for the period may be used to translate those elements. Likewise, the use of other time- and effort-saving methods to approximate the results of detailed calculations is permitted.
830-10-55-11
Average rates used shall be appropriately weighted by the volume of functional currency transactions occurring during the accounting period. For example, to translate revenue and expense accounts for an annual period, individual revenue and expense accounts for each quarter or month may be translated at that quarter's or that month's average rate. The translated amounts for each quarter or month should then be combined for the annual totals.

Illustrations

830-10-55-12
This Example illustrates the application of paragraph 830-10-45-15.
830-10-55-13
A foreign subsidiary of a U.S. entity operating in a highly inflationary economy purchased equipment with a 10-year useful life for 100,000 local currency (LC) on January 1, 19X1. The exchange rate on the purchase date was LC 10 to USD 1, so the U.S. dollar equivalent cost was USD 10,000. On December 31, 19X5, the equipment has a net book value on the subsidiary's local books of LC 50,000 (original cost of LC 100,000 less accumulated depreciation of LC 50,000) and the current exchange rate is LC 75 to the U.S. dollar. In the U.S. parent's financial statements, annual depreciation expense of USD 1,000 has been reported for each of the past 5 years, and at December 31, 19X5, the equipment is reported at USD 5,000 (foreign currency basis measured at the historical exchange rate).
830-10-55-14
As of the beginning of 19X6, the economy of the subsidiary ceases to be considered highly inflationary. Under paragraph 830-10-45-15, a new functional currency accounting basis for the equipment would be established as of January 1, 19X6, by translating the reporting currency amount of USD 5,000 into the functional currency at the current exchange rate of LC 75 to the U.S. dollar. The new functional currency accounting basis at the date of change would be LC 375,000. For U.S. reporting purposes, pursuant to this Subtopic, the new functional currency accounting basis and related depreciation would subsequently be translated into U.S. dollars at current and average exchange rates, respectively.
830-10-55-15
The following Cases illustrate this Section's implementation guidance on remeasurement of inventory that is measured using first-in, first-out (FIFO) and is not recorded in the functional currency (see paragraphs 830-10-45-18 and
830-10-55-8 through 55-9
):
  1. a
    Historical cost in functional currency exceeds net realizable value in functional currency (Case A)
    1. 1
      Subparagraph superseded by Accounting Standards Update No. 2015-11.
    2. 2
      Subparagraph superseded by Accounting Standards Update No. 2015-11.
  2. b
    Net realizable value in functional currency exceeds historical cost in functional currency (Case B).
830-10-55-16
Cases A and B share all of the following assumptions:
  1. a
    BR is the currency in which the books of record are maintained.
  2. b
    FC is the functional currency.
  3. c
    When the rate is BR 1 = FC 2.40, a foreign subsidiary of a U.S. entity purchases a unit of inventory at a cost of BR 500 (measured in functional currency, FC 1,200).
  4. d
    At the foreign subsidiary's balance sheet date, the current rate is BR 1 = FC 2.00.
830-10-55-18
Assume the net realizable value of the unit of inventory is BR 560 (measured in functional currency, FC 1,120). Because net realizable value as measured in the functional currency (FC 1,120) is less than historical cost as measured in the functional currency (FC 1,200), an inventory write-down of FC 80 is required in the functional currency financial statements.
830-10-55-19
Assume the net realizable value at the foreign subsidiary's balance sheet date is BR 620. Because net realizable value as measured in the functional currency (BR 620 x FC 2.00 = FC 1,240) exceeds historical cost as measured in the functional currency (BR 500 x FC 2.40 = FC 1,200), an inventory write-down is not required in the functional currency financial statements.
830-10-55-23
The following Cases illustrate the application of paragraph 830-10-45-12:
  1. a
    The cumulative 3-year inflation rate exceeds 100 percent (Case A).
  2. b
    The cumulative 3-year inflation rate drops below 100 percent but no evidence suggests that drop is other than temporary (Case B).
  3. c
    The cumulative 3-year inflation rate drops below 100 percent after having spiked above 100 percent (Case C).
830-10-55-24
Country A's economy at the beginning of 19X9 continues to be classified as highly inflationary because the cumulative 3-year rate is in excess of 100 percent (see the following table). The recent trend of declining inflation rates should not be extrapolated to project future rates to overcome the classification that results from the calculation.
  • Fiscal Year X1 X2 X3 X4 X5 X6 X7 X8 Annual inflation rate 9% 8% 12% 17% 33% 52% 30% 15% Cumulative three-year rate (a) 32% 42% 74% 137% 163% 127% (a) Amounts are calculated as a compounded three-year inflation rate.
830-10-55-25
Country B's economy at the beginning of 19X9 should continue to be classified as highly inflationary even though the cumulative 3-year rate is less than 100 percent (see the following table) because there is no evidence to suggest that the drop below the 100 percent cumulative rate is other than temporary and the annual rate of inflation during the preceding 8 years has been high.
  • Fiscal Year X1 X2 X3 X4 X5 X6 X7 X8 Annual inflation rate 15% 28% 46% 41% 35% 29% 23% 21% Cumulative three-year rate (a) 115% 164% 178% 146% 114% 92% (a) Amounts are calculated as a compounded three-year inflation rate.
830-10-55-26
Country C's economy at the beginning of 19X9 should no longer be classified as highly inflationary because the cumulative 3-year rate is less than 100 percent (see the following table) and the historical inflation rates suggest that the prior classification resulted from an isolated spike in the annual inflation rate.
  • Fiscal Year X1 X2 X3 X4 X5 X6 X7 X8 Annual inflation rate 5% 6% 4% 7% 12% 55% 18% 6% Cumulative three-year rate (a) 16% 18% 25% 86% 105% 94% (a) Amounts are calculated as a compounded three-year inflation rate.

830-10-60Relationships

Source downloaded: .Record version 49a3abff357a. Effective date must be checked in the source.

Income Taxes

830-10-60-1
For guidance on the tax effects of translation adjustments, see paragraph 740-20-45-11(b).
830-10-60-2
For guidance on an increase in the tax basis of assets because of indexing when the local currency is the functional currency, see paragraph 740-10-25-20(g).

Related subtopics