4.1 Overview

ASC 830-20 addresses the accounting for foreign currency transactions, which the ASC master glossary defines as transactions “whose terms are denominated in a currency other than the entity’s functional currency.” However, the guidance in ASC 830-20 is limited to the measurement and presentation of foreign currency transactions. Therefore, it does not provide guidance on when an entity should recognize a foreign currency transaction in its financial statements. Entities should apply other relevant accounting guidance to determine when a foreign currency transaction should be recognized.

Broadly speaking, there are two types of foreign currency transactions: (1) those that result in the receipt or payment of foreign currency cash only on the date on which the transaction is recognized (e.g., purchasing or selling inventory by using foreign currency cash) and (2) those that will result in the receipt or payment of foreign currency cash on a future date (e.g., purchasing or selling inventory on account). For the first type of foreign currency transaction, the only relevant accounting issue is how to initially measure the recognized asset, liability, or income statement account in an entity’s financial statements. However, for the second type of foreign currency transaction, an additional issue arises with respect to the subsequent measurement of the recognized asset or liability in the financial statements.

The remainder of this chapter focuses on the initial and subsequent accounting for foreign currency transactions.