Chapter 4 — Foreign Currency Transactions

4.4 Investments in Debt and Equity Securities

In accordance with ASC 320-10, investments in debt securities can be classified as trading, AFS, or HTM. Such classification dictates the foreign currency accounting for these investments. Under ASC 321, equity securities are measured at either (1) fair value, with changes in fair value recognized in earnings, or (2) cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer (see ASC 321-10-35-2). The measurement approach applied will affect the foreign currency accounting for these investments.

4.4.1 Investments in Debt Securities

ASC 320-10

35-1 Investments in debt securities shall be measured subsequently as follows:

Trading securities. Investments in debt securities that are classified as trading shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for trading securities shall be included in earnings.
Available-for-sale securities. Investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized except as indicated in the following sentence. All or a portion of the unrealized holding gain and loss of an available-for-sale security that is designated as being hedged in a fair value hedge shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 and 815-25-35-4. . . .

Investments in debt securities that are classified as either trading or AFS under ASC 320-10 are nonmonetary assets and therefore are not subject to remeasurement at current exchange rates under ASC 830. However, ASC 320-10-35-1 requires that trading and AFS securities be subsequently remeasured at fair value.

If a trading or AFS security is denominated in a foreign currency, changes in the exchange rate between the foreign currency and an entity’s functional currency will affect the security’s fair value. Therefore, under ASC 320-10, the trading or AFS security must be remeasured from the foreign currency to the functional currency as of each reporting date by using the current exchange rate to determine the fair value of the security.

ASC 320 further requires that all changes in the fair value of a trading security be recognized in earnings. Conversely, all changes in the fair value of an AFS security must be recognized in OCI.

Connecting the Dots

It would not be appropriate for an entity to bifurcate the change in the fair value of a trading or AFS security related strictly to the change in exchange rates and classify that portion as a transaction gain or loss in the income statement. Rather, the entire change in the security’s fair value (including the portion related to a change in the exchange rates) would be classified in accordance with ASC 320-10.

4.4.1.1 Investments in HTM Debt Securities

ASC 320-10

35-1 Investments in debt securities shall be measured subsequently as follows: . . .

c. Held-to-maturity securities. Investments in debt securities classified as held to maturity shall be measured subsequently at amortized cost in the statement of financial position. A transaction gain or loss on a held-to-maturity foreign-currency-denominated debt security shall be accounted for pursuant to Subtopic 830-20.

Unlike trading and AFS securities, investments in debt securities that are classified as HTM under ASC 320-10 are monetary assets and therefore will give rise to transaction gains or losses under ASC 830-20. HTM debt securities are monetary assets because the amount that the entity will receive upon settlement is fixed and determinable. Further, unlike trading and AFS securities, HTM debt securities must be carried at amortized cost, not fair value.

Accordingly, HTM debt securities that are denominated in a foreign currency must be remeasured as of each reporting date by using the current exchange rate. Any changes in the carrying value of the security that are attributable to changes in exchange rates should be reported as a transaction gain or loss in earnings. The following table summarizes the exchange rates that should be used to remeasure the accounts that may be associated with an investment in an HTM debt security:

Account Description	Exchange Rate
Investment in HTM security	Current spot rate
Accrued interest	Current spot rate
Interest income	Weighted-average rate
Amortization of premium or discount	Weighted-average rate

Connecting the Dots

Loan receivables that are classified as held for investment (HFI) are measured at amortized cost. Therefore, the guidance and examples that apply to HTM debt securities would also apply to foreign-currency-denominated HFI loan receivables carried at amortized cost.5 This guidance is illustrated in the examples below.

Example 4-3

Foreign-Currency-Denominated HTM Security Purchased at Par

On January 1, 20X6, Investor Co, a U.S. registrant whose functional currency is the USD, purchases a 10-year bond bearing 6 percent annual interest with a par value of 1,000,000 EUR. The purchase price of the bond is equal to its par value (i.e., no premium or discount is associated with the bond).

Assume that Investor Co classifies its investment in the bond as an HTM security under ASC 320-10 and that the following exchange rates are in effect during 20X6:

To record its initial investment in the bond in its functional currency, Investor Co records the following journal entry on January 1, 20X6 [€1,000,000 × (€1:$1.2)]:

The table below summarizes the various amounts that would be recorded in Investor Co’s financial statements on December 31, 20X6.

The foreign currency transaction gain calculated above consists of two components: (1) remeasurement of the investment in the bond ($300,000) and (2) remeasurement of accrued interest receivable ($12,000). Since the investment in the bond is a monetary asset, it must be remeasured by using the current spot rate in effect as of December 31, 20X6. This process results in a transaction gain of $300,000 [€1,000,000 × (1.5 – 1.2)]. Further, because the accrued interest receivable represents a monetary asset, it must also be remeasured at the spot rate. However, since the accrued interest receivable was recorded throughout the year at the weighted-average exchange rate (as the interest income was recognized), the transaction gain of $12,000 is calculated as the difference between the spot rate on December 31, 20X6, and the weighted-average exchange rate during 20X6 [€60,000 × (1.5 – 1.3)].

Example 4-4

Foreign-Currency-Denominated HTM Security Purchased at a Discount

Assume the same facts as in Example 4-3, except that Investor Co only pays €900,000 to purchase the bond (i.e., the bond is issued at a discount).

The table below reflects a simplified bond amortization schedule for 20X6.

To record its initial investment in the bond in its functional currency, Investor Co records the following journal entry on January 1, 20X6 [€900,000 × (€1:$1.2)]:

4.4.1.2 Impairment of Debt Securities

Entities use the current expected credit loss (CECL) model in ASC 326-20 to recognize impairment of debt securities held at amortized cost (i.e., HTM securities). Impairment of AFS debt securities is recognized by using the credit loss model in ASC 326-30. Therefore, an entity will have to use different credit loss models if its investment portfolio contains both HTM and AFS securities. For foreign-currency-denominated AFS debt securities, if a credit loss exists but the entity does not intend or would not be required to sell the security before recovery of its amortized cost basis, in accordance with ASC 320-10-35-36, the change in fair value would be recognized (1) in earnings to the extent that the change is related to credit losses and (2) in OCI to the extent that it is related to changes in exchange rates and other factors.

4.4.1.2.1 HTM Debt Securities

ASC 326-20

15-2 The guidance in this Subtopic applies to the following items:

a. Financial assets measured at amortized cost basis, including the following: . . .

2. Held-to-maturity debt securities

30-1 The allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset. Expected recoveries of amounts previously written off and expected to be written off shall be included in the valuation account and shall not exceed the aggregate of amounts previously written off and expected to be written off by an entity. At the reporting date, an entity shall record an allowance for credit losses on financial assets within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses for management’s current estimate of expected credit losses on financial asset(s).

HTM debt securities are within the scope of CECL. An entity will recognize expected credit losses upon initial recognition of an HTM debt security without regard to the security’s fair value. The entity will continually update the underlying cash flows expected to be collected in the currency of the HTM debt securities (i.e., the contract currency) at the end of the financial reporting period when measuring its expected credit losses, irrespective of the HTM debt security’s fair value, and would record any expected credit loss as an allowance (or contra asset) at the end of that reporting period. For more information on how to account for the measurement of expected credit losses on HTM securities, see Deloitte’s Roadmap Current Expected Credit Losses.

Foreign-currency-denominated HTM debt securities are monetary assets; therefore, the amortized cost of such securities would be remeasured from the foreign currency to the entity’s functional currency by using current exchange rates. In a manner consistent with the treatment of the associated HTM debt security, any foreign-currency-denominated allowance for estimated expected credit losses would be treated as a monetary contra asset and would be remeasured by using current exchange rates.

4.4.1.2.2 AFS Debt Securities

Entities are required to recognize an allowance for credit losses on AFS debt securities that are impaired as a result of credit concerns in accordance with ASC 326-30. Such allowances for credit losses can be reversed in subsequent financial reporting periods if there is an improvement in the credit quality of an AFS debt security. The flowchart below illustrates how an entity identifies and assesses impairment on AFS debt securities denominated in a foreign currency.

ASC 326-30

35-1 An investment is impaired if the fair value of the investment is less than its amortized cost basis.

35-6 In assessing whether a credit loss exists, an entity shall compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for credit losses shall be recorded for the credit loss, limited by the amount that the fair value is less than amortized cost basis. Credit losses on an impaired security shall continue to be measured using the present value of expected future cash flows.

35-10 If an entity intends to sell the debt security (that is, it has decided to sell the security), or more likely than not will be required to sell the security before recovery of its amortized cost basis, any allowance for credit losses shall be written off and the amortized cost basis shall be written down to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings. If an entity does not intend to sell the debt security, the entity shall consider available evidence to assess whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis (for example, whether its cash or working capital requirements or contractual or regulatory obligations indicate that the security will be required to be sold before the forecasted recovery occurs). In assessing whether the entity more likely than not will be required to sell the security before recovery of its amortized cost basis, the entity shall consider the factors in paragraphs 326-30-55-1 through 55-2.

ASC 320-10

35-36 The change in the fair value of foreign-currency-denominated available-for-sale debt securities, excluding the amount recorded in the allowance for credit losses, shall be reported in other comprehensive income. See Subtopic 326-30 for measuring credit losses on available-for-sale debt securities. In accordance with the guidance in Subtopic 326-30, an entity shall report credit losses on available-for-sale debt securities in the statement of financial performance as credit loss expense.

When determining whether an impairment exists on an AFS debt security that is denominated in a foreign currency, an entity compares the security’s fair value (measured in the entity’s functional currency at the current exchange rate) with its amortized cost basis (measured at the historical exchange rate). If the fair value of the security is below its amortized cost, the security is impaired. If the impairment is due solely to a credit loss, an allowance for credit losses must be recognized for the credit loss but is not to exceed the amount by which the fair value of the security is less than its amortized cost basis. If, however, (1) an entity intends to sell the impaired security or (2) it is more likely than not that it will be required to sell the impaired security before recovery of its amortized cost basis, any allowance for credit losses must be written off and the amortized cost basis must be written down to the security’s fair value, with any incremental impairment recorded in earnings.

ASC 320-10-35-36 states, in part, that “[t]he change in the fair value of foreign-currency-denominated available-for-sale debt securities, excluding the amount recorded in the allowance for credit losses, shall be reported in other comprehensive income.” As a result, if the entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis, the entity would recognize in OCI the change in the security’s fair value related to the changes in foreign exchange rates.

Connecting the Dots

Stakeholders have questioned when unrealized losses related to changes in foreign exchange rates on an AFS debt security should be recognized in earnings and whether the new guidance in ASC 326-30 will delay loss recognition. Consequently, at the TRG’s November 2018 meeting, the FASB staff confirmed that unrealized losses related to foreign exchange rates should be reported in OCI and recognized in earnings “(a) at the maturity of the security, (b) upon the sale of the security, (c) when an entity intends to sell, or (d) when an entity is more likely than not required to sell the security before recovery of its amortized cost basis.” In addition, the staff said that the concern that the amendments made by ASU 2016-13 (the guidance in ASC 326-30) will result in delayed loss recognition “is beyond the scope of the Credit Losses TRG because the topic relates to reporting changes in fair value related to foreign exchange rates.”

There is diversity in how an entity may translate its credit loss expense to reflect changes in the spot rate. For example, an entity may translate its credit loss expense at the end of the reporting period by using the spot rate that existed when the asset was acquired or the spot rate that exists at the end of the current reporting period. Either approach is acceptable provided that it is applied consistently. Note that this guidance does not apply to HTM securities. Any impairment loss on HTM securities (i.e., monetary assets) is translated by using the spot rate that exists at the end of the current reporting period.

Example 7-4 in Deloitte’s Roadmap Current Expected Credit Losses illustrates the accounting for an impairment of a foreign-currency-denominated AFS debt security.

4.4.2 Investments in Equity Securities

ASC 321 requires that all equity securities be measured at fair value through net income (FVTNI). However, for certain investments in equity securities without a readily determinable fair value that do not qualify for the net asset value practical expedient in ASC 820-10-35-59, an entity is permitted to elect a practicability measurement exception6 to fair value measurement under which the investment is measured at cost, less impairment, plus or minus observable price changes (in orderly transactions) for an identical or similar investment of the same issuer.

For an equity security that is subsequently measured at fair value, all changes in the fair value of the security, including those related to changes in exchange rates, will be reported in net income. Period-end spot rates must be used in such fair value measurements. For foreign-currency-denominated equity securities accounted for by using the measurement exception, the historical exchange rate as of the acquisition date is used to remeasure the security and is updated only on the date a remeasurement adjustment is made as a result of an impairment or an observable price change (see ASC 830-10-45-18).

4.4.2.1 Impairment of Equity Securities

Entities that elect the measurement alternative for equity securities will need to assess the equity investment for impairment. As of each reporting period, an entity must qualitatively consider whether the investment is impaired on the basis of certain indicators. If it determines that the equity security is impaired on the basis of the qualitative assessment, the entity must recognize an impairment loss equal to the amount by which the security’s carrying amount exceeds its fair value.

For equity securities whose fair value is determined in a foreign currency, the fair value would be determined in the entity’s functional currency at the current exchange rate (i.e., at the spot rate on the date of the impairment). Further, the entire difference between the fair value of an equity security and its carrying value would be recorded in earnings as an impairment loss. Therefore, as shown in the example below, the portion of the impairment loss attributable to changes in the exchange rate would not be recorded separately as a foreign currency transaction loss under ASC 830.

Example 4-5

Impairment of a Foreign-Currency-Denominated Equity Security

Investor Co, a U.S. entity whose functional currency is the USD, purchases 750,000 shares of Lumber Co, a Canadian private entity, on November 22, 20X6, for 1,000,000 CAD. Investor Co is a public entity with a calendar year-end. Assume the following facts:

Investor Co classifies its investment in the shares in Lumber Co as an FVTNI security under ASC 321-10.
The fair value of Investor Co’s investment in the shares of Lumber Co and the exchange rates in effect at the time of purchase and at year-end are as follows:

Further, assume that Investor Co has elected the measurement alternative under ASC 321 and determined that the $210,000 impairment loss should be recorded through the following journal entry:

Although part of the impairment is due to the devaluation of the CAD against the USD, the portion of the impairment loss attributable to changes in the exchange rate would not be recorded separately as a foreign currency transaction loss.

Footnotes

Loan receivables that are classified as held for sale (HFS) are measured at the lower of amortized cost or fair value. Both the amortized cost basis and the fair value of foreign-currency-denominated loan receivables classified as HFS would be affected by changes in exchange rates.

The measurement exception is not available to (1) reporting entities that are investment companies, (2) broker-dealers in securities, or (3) postretirement benefit plans.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.