4.3 Subsequent Measurement of Foreign Currency Transactions
ASC
830-20
35-1 A
change in exchange rates between the functional currency and
the currency in which a transaction is denominated increases
or decreases the expected amount of functional currency cash
flows upon settlement of the transaction. That increase or
decrease in expected functional currency cash flows is a
foreign currency transaction gain or loss that generally
shall be included in determining net income for the period
in which the exchange rate changes.
35-2 At each balance sheet
date, recorded balances that are denominated in a currency
other than the functional currency of the recording entity
shall be adjusted to reflect the current exchange rate. At a
subsequent balance sheet date, the current rate is that rate
at which the related receivable or payable could be settled
at that date. Paragraphs 830-20-30-2 through 30-3 provide
more information about exchange rates.
ASC 830-20-35-2 specifies that if a recorded balance is denominated
in a foreign currency, it must be remeasured in each period into the functional
currency by using the current exchange rate. (See Chapter 3 for a discussion of current exchange
rates.) ASC 830-20-35-1 further clarifies that the changes in those recorded
balances, which result from fluctuations in the current exchange rate, are generally
recorded in earnings. The overall objective of this remeasurement process is
explained in ASC 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). [Emphasis added]
ASC 830-10-45-17 states that to comply with the requirements in ASC
830-20 regarding the subsequent accounting for foreign currency transactions, an
entity must use historical exchange rates to remeasure some accounts and current
exchange rates to remeasure others. This guidance further suggests that “monetary”
assets and liabilities would be subject to remeasurement at current exchange rates.
In addition, ASC 830-10-45-18 identifies certain “nonmonetary” accounts that must be
remeasured by using historical exchange rates. Therefore, the subsequent measurement
of a foreign currency transaction depends on whether it results in the recognition
of monetary or nonmonetary assets and liabilities, as illustrated below.
Therefore, properly identifying an account as either monetary or
nonmonetary is critical to correctly applying the subsequent-measurement guidance in
ASC 830-20. The next section explains how to distinguish between the two.
4.3.1 Distinguishing Monetary Assets and Liabilities From Nonmonetary Assets and Liabilities
While the guidance in ASC 830-10-45-17 and 45-18 suggests that
the subsequent-measurement requirements for monetary assets and liabilities (at
current exchange rates) differ from those for nonmonetary assets and liabilities
(at historical exchange rates), it does not actually define either of those
terms. Therefore, it is important for entities to consider the guidance in ASC
830-20-35-2 when distinguishing between the two. This paragraph states that
recorded balances that are denominated in a foreign currency must be remeasured
at current exchange rates (i.e., those accounts would be considered monetary
assets and liabilities). The implementation guidance in ASC 830-10-55-1 and 55-2
clarifies the meaning of a recorded balance that is “denominated in a foreign
currency.”
ASC
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.
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.
As noted above, a recorded balance is denominated in a foreign
currency (and is therefore subject to remeasurement at current exchange rates)
if its amount is “fixed in terms of that foreign currency regardless of exchange
rate changes.” Further, “rights to receive or obligations to pay fixed amounts
of a currency are, by definition, denominated in that currency.” Accordingly,
this implementation guidance suggests that an account would be remeasured at
current exchange rates (and therefore would be a monetary asset or liability) if
it represents a right to receive or an obligation to pay a fixed amount of a
foreign currency regardless of exchange rate changes. All other accounts thus
would be considered nonmonetary and would be remeasured at historical exchange
rates.
In addition, while ASC 830 does not explicitly define the terms
“monetary assets and liabilities” or “nonmonetary assets and liabilities,” other
Codification topics do, notably ASC 255 (on changing prices) and ASC 845 (on
nonmonetary exchanges). While neither of these standards amended or interpreted
the guidance in ASC 830, entities may find it useful to consider the below
definitions.
ASC
255-10 — Glossary
Monetary Assets
Money or a claim to receive a sum of
money the amount of which is fixed or determinable
without reference to future prices of specific goods or
services.
Monetary
Liability
An obligation to pay a sum of money the
amount of which is fixed or determinable without
reference to future prices of specific goods and
services.
ASC 845-10 — Glossary
Monetary Assets and
Liabilities
Monetary assets and liabilities are
assets and liabilities whose amounts are fixed in terms
of units of currency by contract or otherwise. Examples
are cash, short- or long-term accounts and notes
receivable in cash, and short- or long-term accounts and
notes payable in cash.
Nonmonetary Assets
and Liabilities
Nonmonetary assets and liabilities are
assets and liabilities other than monetary ones.
Examples are inventories; investments in common stocks;
property, plant, and equipment; and liabilities for rent
collected in advance.
The tables below summarize common monetary and nonmonetary
balance sheet accounts. Some of the intricate accounts are discussed in more
detail in Sections 4.4 through 4.20.
1
See Section 4.19 for
additional information.
2
See Section 4.20 for
additional information.
3
The term “contract liabilities,” as used here,
is intended to be consistent with the definition in ASC
606-10.
4
See Section 4.6.1 for further
discussion of instruments that must be subsequently remeasured
under ASC 480-10-S99.
Sections
4.3.2 and 4.3.3 discuss how to subsequently measure foreign currency
transactions that result in the recognition of monetary assets and liabilities
and those that result in the recognition of nonmonetary assets and liabilities,
respectively.
4.3.2 Monetary Assets and Liabilities
When a foreign currency transaction results in the recognition
of a monetary asset or liability, that asset or liability is subsequently
remeasured from the foreign currency to the functional currency as of each
reporting date by using the current exchange rate. Therefore, the carrying value
of a monetary asset or liability will change on each reporting date (until the
asset or liability is settled) as a result of changes to the exchange rate
between the foreign currency and the functional currency. Generally, these
changes in the carrying value of monetary assets and liabilities are recognized
in earnings as transaction gains or losses. However, there are certain
exceptions to recognizing such transaction gains and losses in earnings, as
discussed in further detail in Section 9.2.
Connecting the Dots
Transaction gains or losses are generally recorded in
earnings because the change in the exchange rate directly affects the
amount of functional currency that an entity will either receive or pay
when the transaction is settled. That is, changes in exchange rates have
direct effects on an entity’s future cash flows.
The example below illustrates the subsequent measurement of a
foreign currency transaction that results in the recognition of a monetary
liability.
Example 4-2
Subsequent Measurement of a Monetary Liability
This example represents a continuation
of Example 4-1. Assume the following
additional facts:
-
The terms of the transaction specify that Retailer must pay for the inventory in 60 days (on November 14, 20X6).
-
Retailer is a calendar-year public company that files quarterly financial statements.
-
The exchange rates in effect on Retailer’s quarterly reporting date and at the time the transaction is settled, respectively, are as follows:
-
September 30, 20X6: $1 = ¥6.25.
-
November 14, 20X6: $1 = ¥6.75.
-
The original transaction between
Retailer and Supplier resulted in Retailer’s recognition
of an accounts payable balance, which is a monetary
liability. Therefore, Retailer must remeasure that
account as of each reporting date by using the exchange
rate in effect on that date. Accordingly, on September
30, 20X6, Retailer remeasures its accounts payable
balance by dividing the transaction price of ¥1,300 by
the exchange rate in effect on that date ($1 = ¥6.25)
and determines it to be $208. To adjust the carrying
value of the accounts payable balance, Retailer would
record the following journal entry in its financial
statements on September 30, 20X6:
Because the JPY has strengthened against
the USD since the time the transaction was executed,
Retailer now needs more USD (its functional currency) to
pay for the inventory. Retailer therefore records a
foreign currency transaction loss in earnings to reflect
the additional amount of functional currency needed to
settle its liability.
On November 14, 20X6, Retailer settles
the transaction by paying Supplier ¥1,300. To record the
settlement in its financial statements, Retailer must
first remeasure its accounts payable by using the
exchange rate in effect on the settlement date.
Accordingly, Retailer remeasures its accounts payable
balance by dividing the transaction price of ¥1,300 by
the exchange rate in effect on that date ($1 = ¥6.75)
and determines it to be $193 (rounded). To adjust the
carrying value of the accounts payable balance and
settle the accounts payable balance, Retailer would
record the following journal entries in its financial
statements on November 14, 20X6:
From September 30, 20X6, through the
settlement date, the JPY has weakened against the USD.
Therefore, Retailer needed fewer USD to settle its
obligation than it did on September 30, 20X6, because of
the change in the exchange rate. The remeasurement
therefore results in the recognition of a transaction
gain.
4.3.3 Nonmonetary Accounts
When a foreign currency transaction results in the recognition
of a nonmonetary asset or liability, that asset or liability is subsequently
remeasured by using the historical exchange rate. By using the historical
exchange rate, an entity will achieve the same results as it would if it had
originally acquired the asset or incurred the liability in its functional
currency, which is consistent with the remeasurement objective of ASC
830-10-45-17. Therefore, the carrying value of nonmonetary assets and
liabilities will not change as a result of changes in exchange rates between the
foreign currency and the functional currency. As a result, transaction gains or
losses are not recognized for nonmonetary assets and liabilities.
Note that the foreign currency transaction illustrated in
Examples 4-1
and 4-2 resulted in
the recognition of both a nonmonetary asset (inventory) and a monetary liability
(accounts payable). However, unlike the subsequent accounting for accounts
payable in Example 4-2, the inventory
would continue to be remeasured as of each reporting date at the historical
exchange rate. Therefore, Retailer would continue to measure the inventory at
$200 in its financial statements until it is sold or otherwise disposed of
(i.e., changes in the exchange rate would not affect the carrying value of the
inventory).
Connecting the Dots
While ASC 830 requires that nonmonetary assets and
liabilities be subsequently remeasured at historical exchange rates,
other authoritative literature may require that those assets and
liabilities be subsequently remeasured at current exchange rates. For
example, foreign-currency-denominated investments in AFS debt securities
and equity securities are identified by ASC 830 as nonmonetary assets
and therefore would need to be remeasured by using historical exchange
rates. However, ASC 320 and ASC 321 (as discussed further in Section 4.4.1)
require that AFS debt securities and equity securities be subsequently
remeasured at fair value, a component of which is related to foreign
currency exchange rates.
Other authoritative literature takes precedence over ASC
830 in such cases and that the asset or liability should be subsequently
remeasured in accordance with such literature. Therefore, if a
foreign-currency-denominated asset or liability is deemed nonmonetary,
an entity should further consider whether other authoritative literature
requires that the asset or liability be subsequently measured at current
exchange rates, given that such literature requires ongoing
remeasurement at fair value. Changes in the carrying value of the asset
or liability that are related to changes in exchange rates would not
necessarily be reported as transaction gains and losses under ASC 830
but should be presented in accordance with the requirements of those
other standards.
4.3.4 Remeasurement of Books and Records Maintained in a Foreign Currency
ASC
830-20
25-2 Paragraphs 830-10-55-3
through 55-7 provide guidance on the determination of a
reporting entity’s functional currency. Paragraph
830-10-45-17 states that if an entity’s books of record
are not maintained in its functional currency,
remeasurement into the functional currency is required
before translation into the reporting currency. That
paragraph provides further guidance on remeasurement of
books and records.
ASC 830-20-25-2 states that if an entity maintains its books and
records in a currency other than its functional currency, “remeasurement into
the functional currency is required before translation into the reporting
currency.” Such situations occur most commonly when an entity maintains its
books and records in the local currency but, because it operates in a highly
inflationary economy, uses the reporting currency of its immediate parent as its
functional currency. (See Chapter 7 for further discussion of highly inflationary
economies.) However, this requirement applies to all situations in which an
entity maintains its books and records in a currency that differs from its
functional currency.
In such situations, nonmonetary assets and liabilities must be
remeasured at historical exchange rates (i.e., the exchange rates in effect when
the assets or liabilities were initially recognized) while monetary assets and
liabilities must be remeasured at current exchange rates. Accordingly,
remeasurement of monetary assets and liabilities from the foreign currency into
the functional currency will result in the recognition of transaction gains or
losses in earnings. The objective of such remeasurement is to produce the same
results as those that would be produced if the entity had maintained its books
and records in the functional currency; this objective is consistent with the
overall remeasurement principle in ASC 830-10-45-17.