It is the Company’s objective to identify its material foreign currency exposures and to manage those exposures with appropriate derivative instruments or non-derivative alternatives. In general, the Company seeks to minimize the volatility of non-functional currency fluctuations on a consolidated basis. More specifically, the Company manages
- the volatility that non-functional currency fluctuations can potentially have on cash flows and operating margins;
- the potential impact of marking to market non-functional currency exposures and derivatives through the income statement; and
- the cost of its FX risk management program (Campbell, 2008, 31-37).
Functional Currency Approach to Foreign Currency Translation
Functional Currency Approach
Most companies exercise the functional currency approach in trading through foreign currency translation.
The objects incorporated in the financial statements of the companies are restricted utilizing the currency of the primary economic atmosphere in which a company activates and manages its financial functions. The consolidated financial statements are presented in US dollars, which is the functional currency of most companies.
All procedures are performed in foreign currencies are translated into the functional currency at most of the companies. Foreign currency transactions are recorded on preliminary appreciation in the functional currency by pertaining to the foreign currency quantity the spot replace rate between the functional currency and foreign currency at the date of the transaction. Transaction date is the date on which the business first has the right to recognition (Davis, Rivera, 2000, 113-135).
Subsequent Treatment of Monetary Items
Monetary assets in foreign currencies are translated into the functional currency at the balance sheet date. Where the asset or liability is the monetary exchange rate that is fixed in accordance with the terms of the treaty can not be used to translate monetary assets and liabilities as a form of hedge accounting (Clarke, 2000, 267-284).
Subsequent Treatment of Non-Monetary Items
Non-monetary items measured in terms of historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary items measured at fair value in foreign currency are translated at the exchange rate at the date of determination of fair value.
The remeasurement process is a result of the transaction’s net profit or loss, which will be included in the income or profit or loss. Identifying components of the transaction’s net profit or loss from revaluation of foreign currency financial statements for the classification of the relevant sections or categories in the statement of comprehensive income will be more complicated than simply including the profit or loss on a separate currency item in the same category as an asset or liability that led to it. Nevertheless, the staff notes that statements 52 and IAS 21 does not make a conceptual distinction between profits or loss on individual assets and liabilities denominated in foreign currencies, and net profit or loss on foreign currency transactions of financial statements.
Since reporting a cohesive category, the company should be able to determine the net foreign exchange gain or loss for each category in substantially the same as it will determine the net profit or loss sharing for the entire organization. Staff believes that the appointment of revaluation gains and losses in categories that lead to them in the statement of comprehensive income provides more useful information about the exchange rate and loss and would not be overly burdensome changes over what is currently required.
Foreign Currency Rates
For purposes of financial statement re-measurement and f/x transaction accounting, month end Balance Sheet Rates and Income Statement Rates will be identified and communicated by the Chief Financial Officer. The Company will use Oanda as the recognized source to find this information (Gordon, 2001, 177-200).
FAS 52 requires that non-functional currency denominated monetary assets and liabilities (i.e., cash, accounts receivable, other receivables, debt, accounts payable, short-term intercompany loans and notes payable) be denominated in an entity’s functional currency prior to translation. Gains or losses resulting from re-measurement are reflected in the income statement on a monthly basis (King, 2003, 54-57).
The Company has re-measurement balance sheet exposures, which refer to the changes in the value of non-functional-currency-denominated monetary assets and liabilities (i.e. cash, accounts receivable, accounts payable, intercompany loans, etc.) subject to FAS 52 re-measurement between the time an exposure is recognized on the financial statements and is eventually settled. FX gains or losses resulting from re-measurement exposures flow directly into the income statement, usually into other income (Hughes, and 2004, 731-754).
Campbell, R. L., L. A. Owens-Jackson and D. R. Robinson. 2008. Fair value accounting from theory to practice. Strategic Finance: 31-37.
Clarke, F. L. 2000. Chambers on price and price-level variations: Exiting intellectual grooves. Abacus 36(3): 267-284.
Davis-Friday, P. Y. and J. M. Rivera. 2000. Inflation accounting and 20-F disclosures: Evidence from Mexico. Accounting Horizons: 113-135.
Gordon, E. A. 2001. Accounting for changing prices: The value relevance of historical cost, price level, and replacement cost accounting in Mexico. Journal of Accounting Research: 177-200.
Hughes, J., J. Liu and M. Zhang. 2004. Valuation and accounting for inflation and foreign exchange. Journal of Accounting Research: 731-754.
King, A. M. 2003. Fair value accounting: Its time has come and gone. Strategic Finance: 54-57.