4.2 Initial Measurement of Foreign Currency Transactions
ASC 830-20
25-1 At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be recorded in the functional currency of the recording entity.
30-1 At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured initially in the functional currency of the recording entity by use of the exchange rate in effect at that date.
Under ASC 830-20-25-1 and ASC 830-20-30-1, all foreign currency transactions
must be measured in the recording entity’s functional currency. This is accomplished
by using the exchange rate in effect on the date on which the transaction is
recognized. However, as discussed in Chapter 3, an entity may, out of convenience,
determine that an appropriate weighted-average exchange rate may be used for
measuring income statement accounts. The example below illustrates the initial
measurement of a foreign currency transaction.
Example 4-1
Initial Measurement of a Foreign Currency
Transaction
On September 15, 20X6, Retailer, a U.S.
entity whose functional currency is the USD, purchases
inventory from Supplier, a Japanese entity whose functional
currency is the JPY (¥). The amount that Retailer owes
Supplier for the inventory is ¥1,300. Assume that the
exchange rate in effect on September 15, 20X6, is $1 =
¥6.50.
This transaction represents a foreign
currency transaction for Retailer since its functional
currency is the USD and the transaction price is denominated
in a different currency (JPY). In accordance with ASC
830-20, Retailer must record the transaction in its
functional currency (USD). To determine the amount to record
in USD, Retailer divides the transaction price (¥1,300) by
the exchange rate that was in effect when the transaction
was recognized ($1 = ¥6.50). Therefore, Retailer would
record the following journal entry in its financial
statements on September 15, 20X6:
From Supplier’s perspective, this
transaction does not represent a foreign currency
transaction since it is denominated in its functional
currency (JPY). Therefore, Supplier recognizes the
transaction in its financial statements at the stated
transaction price (¥1,300).