Chapter 3 — Exchange Rates
Chapter 3 — Exchange Rates
3.1 Overview
Foreign currency transactions must be remeasured into an entity’s
functional currency in accordance with ASC 830-20 on accounting for foreign currency
transactions, as described in Chapter 4.
After the remeasurement process, an entity must use the current-rate
method to translate its financial statements into its parent’s reporting currency.
See Chapter 5 for
further discussion related to the translation of foreign entity financial
statements.
While ASC 830 provides some guidance on which exchange rates are to
be used, it may not always be clear that a particular exchange rate is appropriate
and an entity may need to use judgment in making this determination. For example, an
entity may often consider economic, market, and political circumstances. This
chapter discusses the selection and use of appropriate exchange rates, both as
discussed in ASC 830 and in various other situations.
3.2 Selecting Exchange Rates
ASC 830 defines an exchange rate as the “ratio between a unit of one
currency and the amount of another currency for which that unit can be exchanged at
a particular time.”
3.2.1 Current Rate Versus Average Rate
Foreign entities are required to use the current exchange
rate1 to translate their financial statements into the reporting currency of the
reporting entity. ASC 830-30-45-3 describes such translation as follows:
All elements of financial statements shall be translated
by using a current exchange rate as follows:
-
For assets and liabilities, the exchange rate at the balance sheet date shall be used.
-
For revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized shall be used.
This guidance also applies to accounting allocations
(for example, depreciation, cost of sales, and amortization of deferred
revenues and expenses) and requires translation at the current exchange
rates applicable to the dates those allocations are included in revenues
and expenses (that is, not the rates on the dates the related items
originated).
The following table summarizes the translation exchange rates to
use for various types of accounts:
Type
of Account | Exchange Rate for Translation |
---|---|
Assets and liabilities | Current exchange rate in effect on the
balance sheet date |
Equity (excluding change in retained
earnings due to current-year net income) | Historical exchange rates |
Dividends | Current rate at dividend declaration |
Capital-contribution equity
transactions | Current rate as of the transaction date |
Change in retained earnings —
current-year net income | Weighted-average exchange rate for the
period |
Income statement accounts | Weighted-average exchange rate for the
period |
As indicated above, assets and liabilities should be translated
at the exchange rate on the balance sheet date. However, although ASC 830 states
that revenues, expenses, gains, losses, and accounting allocations (e.g.,
depreciation, cost of sales, and amortization of deferred revenues and expenses)
should be translated by using the exchange rate on each date of recognition in
earnings during the period, a weighted-average rate generally may be
appropriate, as discussed further below. Moreover, although ASC 830 does not
provide guidance on which rate should be used to translate a foreign entity’s
equity accounts, it would be appropriate to translate equity accounts at
historical rates (as indicated in the table above), except changes to retained
earnings for current-period net income, which would be translated at the
weighted-average rate (discussed further below). When historical exchange rates
are used, capital transactions, such as contributions, investments, and
dividends, would be translated at the rate on the date of recognition.
Because of the recognition requirements for certain types of
income statement items, translation at the exchange rate on each date of
recognition may prove difficult or burdensome. ASC 830 therefore provides an
expedient under which an entity uses an appropriate rate that is expected to
yield a result similar to that achieved by using the exchange rate on each date
of recognition.
ASC
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.
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.
Period-appropriate, weighted-average exchange rates are most
commonly used for income statement items that have recognition patterns
throughout the period. A monthly, quarterly, or annual rate should be determined
and used to translate monthly, quarterly, or annual income statements,
respectively. Monthly or quarterly income statements translated at the relevant
averaged rates would then be added together, as appropriate, to arrive at the
year-end statement. An entity should carefully determine when it is appropriate
to use averaging to translate income statement items. For example, a
weighted-average rate may not be appropriate for items that are tied to discrete
events, such as certain impairments or write-offs. In that case, the exchange
rate from that specific date would be required.
Connecting the Dots
When applying weighted-average exchange rates to income
statement items, an entity should calculate the “weighting”
appropriately by considering the pattern of recognition. Developing an
appropriate weighted-average exchange rate may include consideration of
complexities that are specific to the foreign entity’s operations,
including seasonality, multiple product lines with various recognition
patterns, and uneven expense recognition. An entity should also consider
volatility in foreign currency exchange rates. Further, an entity has
flexibility to determine the appropriate rate given that “other
[appropriate] methods of approximation” may also be used for translating
income statement items. For these reasons, consultation with accounting
advisers is encouraged if an entity needs to use significant judgment in
calculating a weighted-average exchange rate or applying another method
of approximation.
3.2.2 Multiple Exchange Rates
When multiple legal exchange rates coexist, such as an official
exchange rate and an unofficial exchange rate, a parallel or dual exchange-rate
situation exists. In such circumstances, if it can be reasonably demonstrated
that transactions have been or could have been legally settled at the unofficial
rate (including currency exchanges for dividend or profit repatriations), it may
be appropriate to use the unofficial rate for translation or remeasurement.
ASC
830-30
45-6 In the absence of unusual
circumstances, the exchange rate applicable to
conversion of a currency for purposes of dividend
remittances shall be used to translate foreign currency
statements.
Although not codified, paragraph 138 of the Basis for Conclusions of FASB Statement 52 (codified in ASC 830) is helpful for
understanding this concept. The FASB concluded that in the absence of unusual
circumstances, an entity should use the dividend remittance rate to translate
foreign financial statements if multiple exchange rates exist. This rate was
considered more meaningful because cash flows to the reporting entity can only
occur at this rate and realization of the net investment depends on the cash
flows from that foreign entity.
Unusual circumstances in which an entity may be permitted to use
an alternative legal exchange rate in translating the financial statements of a
foreign subsidiary could include (1) a history of obtaining the alternative
exchange rate for remittances of earnings or dividends distributed outside the
foreign country and (2) the ability to source funds at the alternative exchange
rate if there is no question of asset impairment.
Example 3-1
Multiple Exchange Rates
Company A, a U.S. company whose fiscal
year ended on June 30, 20X1, has a foreign subsidiary,
Company B. On June 30, 20X1, an official exchange rate
existed for conversion of the foreign currency to USD.
Because of foreign currency restrictions, however, few
exchanges were made at that rate. About 80 percent of
B’s earnings for the year ended June 30, 20X1, were
converted to USD (and remitted to A) at a rate
substantially lower than the official rate (the
unofficial rate). The unofficial exchange rate was
determined by the local broker making the conversion and
by an informal foreign exchange market that existed in
the foreign country. Although exchange restrictions
existed, B’s remittance transactions at the unofficial
rate were not illegal transactions. In this example, the
unofficial rate should be used for translation or
remeasurement.
Furthermore, the rate used must be a legal rate (see Section 3.2.4).
3.2.2.1 Determining the Appropriate Exchange Rate for Remeasurement When Multiple Rates Exist
Under ASC 830, all entities must remeasure all
foreign-currency-denominated transactions into their functional currency for
each reporting period, with changes in foreign currency rates recognized in
earnings. ASC 830-20-30-3 indicates that to perform such remeasurement, an
entity should use the applicable rate(s) at which a transaction could be
settled as of the transaction date to translate and record the transaction.
If multiple exchange mechanisms and published exchange rates exist that are
considered to be legal (official and unofficial), such rates could
potentially be available for remeasurement. Accordingly, the entity will be
required to reevaluate the exchange rate previously used for remeasurement.
While the ultimate selection of an exchange rate (or multiple rates) should
be based on the entity’s specific facts and circumstances, relevant factors
for consideration include (but may not be limited to) the following:
-
Whether the entity can legally use a specified rate (or multiple rates) to convert currency or settle transactions.
-
Whether the exchange rates are published.
-
The probability of accessing and obtaining USD by using a particular rate or exchange mechanism.
-
The entity’s intent and ability to use a particular exchange mechanism.
Management will need to exercise significant judgment when
considering the above factors. Accordingly, an entity should clearly
document the facts and circumstances that it considered in its analysis of
what exchange rate(s) to use for remeasurement. Because of the potential for
frequent changes in exchange rate mechanisms, an entity may not have
experience with settling transactions at certain exchange rates given the
limited period in which these exchange rates have been available.
Notwithstanding a lack of history at transacting at a particular exchange
rate, an entity should be able to support (1) how the rate or rates used for
remeasurement are most representative of the entity’s economic circumstances
and (2) its intent to use the rate(s) or exchange mechanism(s) specified. An
entity may also need to assess whether it should obtain a legal
interpretation to sustain its assertion that it can access certain exchange
rates and mechanisms.
The SEC considerations below are based on informal
discussions with the SEC staff regarding Venezuelan highly inflationary
foreign operations. However, entities can apply these observations in
determining the most appropriate exchange rate to use when multiple exchange
mechanisms and published exchange rates exist.
SEC Considerations
The SEC staff has observed that as a result of
changes in the currency rate environment, an entity may, in certain
circumstances, be able to support using a rate other than the
official rate for remeasurement.
When determining the most appropriate exchange rate(s) for
remeasurement of an entity’s foreign-currency-denominated monetary balances
when multiple exchange rates exist, an entity may find the following process
helpful:
-
Identify transactions for which the entity’s government has granted approval to obtain another currency at certain rates (including foreign-currency-denominated monetary assets that will be required before approved foreign-currency-denominated liabilities can be settled) and remeasure by using the preapproved exchange rate(s).
-
For any remaining foreign-currency-denominated liabilities (i.e., those for which the entity’s government has not yet granted approval to settle by using the foreign currency obtained at certain rates), determine which mechanisms the entity can legally access to obtain the foreign currency and remeasure the volume of foreign-currency-denominated monetary assets needed to obtain that foreign currency at the exchange rates that the entity expects to use when it settles the payables.
-
Remeasure any remaining net foreign-currency-denominated monetary items by using the rates that are most representative of the entity’s economics and are most likely to be available to settle the transactions.
SEC Considerations
The SEC staff identified factors that registrants
should consider in selecting the exchange rate(s) to use for
remeasurement. The staff reiterated that:
- A registrant must exercise judgment when determining the exchange rate(s) that should be used to remeasure its foreign-currency-denominated balances. That judgment should be based on the registrant’s specific facts and circumstances.
- In U.S. GAAP, there is no support for use of a rebuttable presumption under which registrants should remeasure foreign currency monetary assets/liabilities by using the least favorable legal exchange rate when multiple legal exchange rates exist.
- A registrant that previously used a different rate to remeasure its foreign-currency-denominated monetary assets/liabilities in prior periods should (1) consider all of the recent changes in the entity’s foreign exchange mechanisms and (2) consistently apply its rate selection approach.
- Depending on facts and circumstances, it may be appropriate for a registrant to use multiple exchange rates for remeasurement.
- Registrants with material foreign operations affected by multiple exchange rates should continue to provide transparent disclosures regarding the items described above.
Regardless of the rate selected, registrants should maintain
documentation of their rate selection analysis as well as the relevant facts
and circumstances they considered in using their judgment to select an
appropriate exchange rate or rates.
3.2.2.2 Assets and Liabilities Subject to Multiple Exchange Rates
ASC 830-30 — SEC Materials — SEC Staff Guidance
SEC Staff Announcement: Foreign Currency Issues:
Multiple Foreign Currency Exchange Rates
S99-1 This SEC staff
announcement provides the SEC staff’s views on
Foreign Currency Issues.
The SEC staff has received a number of inquiries regarding
certain foreign currency issues related to
investments in Venezuela. This announcement is in
response to those inquiries that have been received
by the SEC staff on the issues described below.
Amongst other requirements, current restrictions of foreign
currency exchange in Venezuela provide that entities
use the official rate of exchange (official rate) to
exchange funds. The official rate is set by the
Venezuelan government and in order to use the
official rate to exchange currency, entities seek
the ability to utilize the official rate from
Venezuela’s Commission for Administration of Foreign
Currencies (CADIVI).
As an alternative to the use of the official rate it may
also be legal to utilize the parallel rate. It is
possible that the parallel rate provides entities
with a more liquid exchange and entities can access
the parallel rate using a series of transactions via
a broker. The parallel rate has recently been
significantly different from the official rate.
Reported Balances in an Entity’s Financial Statements
That Differ From Their Underlying U.S. Dollar
Denominated Values
With respect to accounting for a subsidiary in Venezuela in
cases where the parent’s reporting currency is the
U.S. dollar and the Venezuelan subsidiary’s
functional currency is the Venezuelan Bolivar
(“Bolivar” or “BsF”), the staff has recently become
aware of the following fact pattern: In years prior
to 2010, certain entities may have used the parallel
rate to remeasure certain U.S. dollar denominated
balances that the Venezuelan subsidiary held and
then subsequently translated the Venezuelan
subsidiary’s assets, liabilities, and operations
using the official rate. The effect of this
accounting treatment resulted in reported balances
in an entity’s financial statements that differed
from their underlying U.S. dollar denominated
values. (The staff notes that these differences
arise when different rates are used for
remeasurement and translation.) In order to
illustrate the impact that these differences may
have on different accounts within the financial
statements, two illustrations are provided
below.
First, assume that at a period end prior to January 1, 2010
(for a calendar year entity), a U.S. entity’s
Venezuelan subsidiary held $10 million of cash
denominated in U.S. dollars. Further assume that at
the period end, the parallel rate was 5 Bolivars to
every 1 U.S. dollar and the official rate was 2
Bolivars to every 1 U.S. dollar. Upon the
remeasurement of the U.S. denominated cash to
Bolivars and the subsequent translation of the
Venezuelan subsidiary’s financial statements, an
entity would have reported cash of $25 million for
financial reporting purposes. (The $25 million is
calculated as follows: First, the $10 million of
cash is remeasured using the parallel rate to 50
million BsF; subsequently, the 50 million BsF is
translated back to U.S. dollars using the official
rate of 2 Bolivars to 1 U.S. dollars, resulting in a
translated reported balance of $25 million.)
Second, assume that at a period end prior to January 1,
2010 (for a calendar year entity), a U.S. entity’s
Venezuelan subsidiary held $15 million of accounts
payable denominated in U.S. dollars (also assume the
exchange rates are the same as in the example
above). Upon the remeasurement of the U.S.
denominated accounts payables to Bolivars and the
subsequent translation of the Venezuelan
subsidiary’s financial statements, an entity would
have reported accounts payable of $37.5 million for
financial reporting purposes. (The $37.5 million is
calculated as follows: First, the $15 million of
accounts payable is remeasured using the parallel
rate to 75 million BsF; subsequently, the 75 million
BsF is translated back to U.S. dollars using the
official rate of 2 Bolivars to 1 U.S. dollars,
resulting in a translated reported balance of $37.5
million.)
Finally, the staff has noted that Venezuela has met the
thresholds for being considered highly inflationary
and accordingly, calendar year entities that have
not previously accounted for their Venezuelan
investment as highly inflationary will begin
applying highly inflationary accounting beginning
January 1, 2010.
Disclosures
The staff believes that in cases where reported balances
for financial reporting purposes differ from the
actual U.S. dollar denominated balances (such as in
the illustrations above), a registrant should make
disclosures that inform users of the financial
statements as to the nature of these differences.
When material, the disclosures in both annual and
interim financial statements should, at a minimum,
consist of the following (The staff is aware that
certain registrants have already filed their 2009
Form 10-K’s and accordingly the staff would not
necessarily expect these specific disclosures to be
included in these registrant’s 2009 Form 10-K’s.):
-
Disclosure of the rates used for remeasurement and translation.
-
A description of why the actual U.S. dollar denominated balances differ from the amounts reported for financial reporting purposes, including the reasons for using two different rates with respect to remeasurement and translation.
-
Disclosure of the relevant line items (e.g. cash, accounts payable) on the financial statements for which the amounts reported for financial reporting purposes differ from the underlying U.S. dollar denominated values.
-
For each relevant line item, the difference between the amounts reported for financial reporting purposes versus the underlying U.S. dollar denominated values.
-
Disclosure of the amount that will be recognized through the income statement (as well as the impact on the other financial statements) as part of highly inflationary accounting beginning in 2010 (see below).
Impact of Highly Inflationary Accounting on Differences
Between Amounts Recorded for Financial Reporting
Purposes Versus the Underlying U.S. Dollar
Denominated Values
The staff notes that upon application of highly
inflationary accounting (January 1, 2010 for
calendar year registrants), registrants must follow
the accounting outlined in paragraph 830-10-45-11,
which states that “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, upon the application of highly inflationary
accounting requirements, a U.S. reporting currency
parent and subsidiary effectively utilize the same
currency (U.S. dollars) and accordingly there should
no longer be any differences between the amounts
reported for financial reporting purposes and the
amount of any underlying U.S. dollar denominated
values that are held by the subsidiary. Therefore,
the staff believes that any differences that may
have existed prior to applying highly inflationary
accounting requirements between the reported
balances for financial reporting and the U.S. dollar
denominated balances should be recognized in the
income statement, unless the registrant can document
that the difference was previously recognized as a
cumulative translation adjustment (in which case the
difference should be recognized as an adjustment to
the cumulative translation adjustment).
Furthermore, the staff believes that these differences
should be recognized at the time of adoption of
highly inflationary accounting.
Other
The SEC staff is aware that the EITF will be discussing
certain issues related to foreign currency,
including the accounting for multiple exchange rates
in Venezuela, and accordingly the guidance in this
staff announcement is intended to be interim
guidance pending the EITF completing its
deliberations.
When “differences that may have existed prior to applying
highly inflationary accounting requirements between the reported balances
for financial reporting and the U.S. dollar denominated balances” are to be
recognized in earnings, an entity should disclose the effects of the
adjustment on the financial statements in the period before the entity
reflects the accounting effects of the economy’s becoming highly
inflationary.
Connecting the Dots
Although the guidance above indicates that
recognition of the impact in CTA is a potential outcome when highly
inflationary accounting is initially adopted, such an outcome is
expected to be rare in practice. In cases in which an entity
believes that it can demonstrate that the difference was previously
recognized in CTA, consultation with accounting advisers is strongly
encouraged.
3.2.3 Preference or Penalty Rates
ASC
830-30
45-7 If unsettled intra-entity
transactions are subject to and translated using
preference or penalty rates, translation of foreign
currency statements at the rate applicable to dividend
remittances may cause a difference between intra-entity
receivables and payables. Until that difference is
eliminated by settlement of the intra-entity
transaction, the difference shall be treated as a
receivable or payable in the reporting entity’s
financial statements.
Regulation of foreign exchange markets by foreign governments
may dictate the exchange rates to be used to convert local currency into other
currencies. Those rates are set by the foreign governments, rather than the
market exchange rate, and may be either favorable (preferential rate) or
unfavorable (penalty rate) compared with the rate that applies to other
transactions. For example, a foreign government may establish a rate of LC5:$1
for certain goods it deems essential while the prevailing market rate may be
LC10:$1. As indicated in the example above provided by the SEC staff in a
speech, this situation has existed in Venezuela in recent years because its
government enacted regulations to protect the country’s level of currency
reserves as a result of the deterioration of the Venezuelan economy.
An entity should carefully consider whether the rate to be used
for remeasuring monetary items is the preference or penalty rate and should
appropriately support use of either rate for remeasuring monetary items to
demonstrate that conversion of the monetary items at that rate could have been
achieved. If use of a preference or penalty rate cannot be supported, the entity
should use the rate applicable to dividend remittances.
Connecting the Dots
In certain jurisdictions, governments enact exchange laws that impose
strict criminal and economic sanctions on exchanging local currency with
other foreign currency through methods that are not officially
designated or on obtaining foreign currency under false pretenses.
Because of the currency volume limitations imposed by
governments, entities may try to find other legal ways of exchanging
currency. One method that some entities use is the purchase of debt or
equity securities in the local market and the immediate sale of those
securities in the international market for a different currency,
generally U.S. dollars. These transactions result in an indirect rate —
sometimes called a “parallel,” “offshore,” or “blue chip” rate — through
which entities may obtain foreign currency “legally” without resorting
to or requesting currency directly from the government. The average rate
of exchange in these markets is variable and can fluctuate significantly
above the official rate. The U.S. security would be purchased and
subsequently sold outside the jurisdiction that imposes the currency
restrictions. Therefore, these market transactions may be used to settle
foreign currency obligations and to move currency in and out of those
jurisdictions.
When entities transact by swapping securities, foreign
currency is purchased through a series of transactions that involve a
broker. For example, an entity would purchase a bond in the local
jurisdiction by using local currency, swap it for a
U.S.-dollar-denominated security, sell the U.S. security on the
international securities market, and obtain U.S. dollars on the same
date. However, in certain jurisdictions, laws preclude an entity from
purchasing and selling securities on the same date in a different
jurisdiction. Such a situation is referred to as the minimum holding
period (e.g., three or five days). When a minimum holding period exists,
the purchase/sale of securities cannot be construed as representing an
exchange rate under ASC 830 but should be considered a purchase and
separate disposal of securities in which the gain or loss represents a
gain or loss on the disposal of securities. The determination of whether
a minimum holding period exists is a matter of legal interpretation;
accordingly, entities should consider obtaining legal advice when making
this determination.
3.2.4 Black Market Rates
In certain countries, illegal foreign currency exchange markets
may develop as a result of restrictive foreign exchange controls. Such markets
and resulting rates are referred to as “black market exchange rates” or “black
market rates” since they are not legally recognized. Accordingly, use of black
market rates is not appropriate for either remeasurement or translation purposes
under ASC 830.
This conclusion is consistent with discussion at the March 4,
2003, meeting of the AICPA SEC Regulations Committee’s International Practices
Task Force2 (IPTF or “the Task Force”) and was later reaffirmed in the highlights of the November 25, 2008, meeting concerning the
appropriate foreign exchange rates to be used for remeasurement and translation
purposes. The meeting highlights state, in part:
The Task Force believes that . . . US GAAP does not
permit the use of a black market exchange rate since such a rate is not
objective or determinable. Instead, individual transactions should be
translated at either the parallel rate, or the official exchange rate
based on the facts and circumstances, and if there are more than one
official exchange rate depending on the transaction (e.g., dividend
remittances), then the appropriate exchange rate should be used.
3.2.5 Lack of Exchangeability
ASC
830-20
30-2 If exchangeability between
two currencies is temporarily lacking at the transaction
date or balance sheet date, the first subsequent rate at
which exchanges could be made shall be used for purposes
of this Subtopic. If the lack of exchangeability is
other than temporary, the propriety of consolidating,
combining, or accounting for the foreign operation by
the equity method in the financial statements of the
reporting entity shall be carefully
considered.
This concept is illustrated in the following example from ASC
830-30-55-1:
Example 1: Exchange Rate When
Exchangeability Is Lacking Temporarily
This Example illustrates the appropriate exchange rate
to be used for translating financial statements when foreign exchange
trading is temporarily suspended at year-end. The following are facts
involving a reporting entity that had a significant subsidiary in
Israel:
-
On December 29, 1988, the currency market was open and foreign currencies were traded. The exchange rate was FC 1.68 = USD 1.00.
-
On December 30, 1988, Israeli banks were officially open but foreign exchange trading was suspended until January 2, 1989. A devaluation to occur on January 2, 1989, was announced. Most businesses were closed for the holidays.
-
On December 31, 1988, banks were closed.
-
On January 1, 1989, banks were closed.
-
On January 2, 1989, foreign exchange transactions were executed but left unsettled until the following day when a new rate was to be established.
-
On January 3, 1989, a new exchange rate of FC 1.81 = USD 1.00 was established and was effective for transactions left unsettled the previous day.
Thus, exchangeability was temporarily lacking and the
rate established as of January 3, 1989, the first subsequent rate, is
the appropriate rate to use for translating the December 31, 1988,
financial statements.
In a manner consistent with ASC 830-20-30-2 and the example
above, if there is a temporary lack of exchangeability between two currencies as
of the transaction or balance sheet date, an entity should use the first
subsequent rate at which exchanges could be made.
The IPTF discussed what was intended by the term “first
subsequent rate” at its January 14, 2001, meeting. The meeting highlights state:
The Task Force did not believe that this guidance should be read
literally as the “first” exchange transaction. Certain members of the
Task Force informally discussed this issue with the staff of the FASB,
who indicated their view that the guidance in FAS 52 was not intended to
be literally the “first” transaction.
Accordingly, an entity should use judgment in determining the
appropriate exchange rate to use. In making this determination, the entity
should consider all factors available, including the volume, size, and types of
transactions. Furthermore, the absence of observable large transactions would
not necessarily be indicative of a continued temporary lack of
exchangeability.
Footnotes
1
ASC 830-30-45-4 defines the current exchange rate as
“the rate as of the end of the period covered by the financial
statements or as of the dates of recognition in those statements in the
case of revenues, expenses, gains, and losses.”
2
The IPTF is a committee of the Center for Audit Quality
that focuses on emerging international technical accounting and
reporting issues related to SEC rules and regulations. The IPTF meets
periodically with the SEC staff to discuss such issues.
3.3 Changes in Exchange Rates
ASC 830-30
45-16 A reporting entity’s financial statements shall not be adjusted for a rate change that occurs after the date of the reporting entity’s financial statements or after the date of the foreign currency statements of a foreign entity if they are consolidated, combined, or accounted for by the equity method in the financial statements of the reporting entity.
50-2 Disclosure of a rate change
that occurs after the date of the reporting entity’s
financial statements or after the date of the foreign
currency statements of a foreign entity if they are
consolidated, combined, or accounted for by the equity
method in the financial statements of the reporting entity
and its effects on unsettled balances pertaining to foreign
currency transactions, if significant, may be necessary.
ASC 830-20
50-2 Disclosure of a rate
change that occurs after the date of the reporting entity’s
financial statements and its effects on unsettled balances
pertaining to foreign currency transactions, if significant,
may be necessary. If disclosed, the disclosure shall include
consideration of changes in unsettled transactions from the
date of the financial statements to the date the rate
changed. In some cases it may not be practicable to
determine these changes; if so, that fact shall be
stated.
Under ASC 830-30-45-16, an entity should not adjust its financial statements to
reflect changes in exchange rates that occur after the balance sheet date of a
reporting entity or foreign entity included in the financial statements. Rather, in
accordance with ASC 830-20-50-2 and ASC 830-30-50-2, an entity must disclose
significant effects of changes in exchange rates related to unsettled foreign
currency transactions.
3.3.1 Foreign Entity Reported on a Lag — Impact of a Significant Devaluation
ASC 830-30
45-8 If a foreign entity whose balance sheet date differs from that of the reporting entity is consolidated or combined with or accounted for by the equity method in the financial statements of the reporting entity, the current rate is the rate in effect at the foreign entity’s balance sheet date for purposes of applying the requirements of this Subtopic to that foreign entity.
Despite the guidance in ASC 830-30-45-8 above, it may sometimes be appropriate
to translate the financial statements of a consolidated subsidiary by using an
exchange rate as of the parent’s balance sheet date.
ASC 810-10-45-12 states that “recognition should be given by disclosure or otherwise to the effect of intervening events that
materially affect the financial position or results of operations” (emphasis
added) that occur during the reporting time lag (i.e., the period between the
subsidiary’s year-end reporting date and the parent’s balance sheet date). We
believe that an entity may elect a policy of either disclosing, or disclosing and recognizing, all material intervening events,
including changes in exchange rates, provided that either policy is consistently
applied.
Example 3-2
Foreign Entity Reported on a Lag — Impact of a
Significant Devaluation
A parent company includes a foreign
subsidiary’s financial statements for the year ended
November 30, 20X1, in the parent company’s consolidated
financial statements for the year ended December 31,
20X1. Between November 30 and December 31, the
functional currency of the subsidiary devalues
significantly against the parent company’s reporting
currency.
Therefore, the parent company should
consider whether the devaluation of the foreign
subsidiary’s functional currency constitutes a material
intervening event. If the parent company concludes that
the devaluation is a material intervening event and has
an established accounting policy to disclose and
recognize material intervening events, it should use the
December 31, 20X1, exchange rate to translate the
subsidiary’s November 30, 20X1, financial statements. In
all circumstances, regardless of which policy is
elected, detailed disclosure should be provided in the
financial statements.