Chapter 9 — Presentation and Disclosure
Chapter 9 — Presentation and Disclosure
9.1 Overview
This chapter summarizes the foreign-currency-related presentation and disclosure requirements for reporting entities, including those in ASC 830 and those that affect SEC registrants.
9.2 Transaction Gains and Losses
ASC 830-20
Income Statement Presentation
Aggregate Transaction Gain or Loss
45-1 The aggregate transaction gain or loss included in determining net income for the period shall be disclosed in the financial statements or notes thereto.
Pending Content – Transition Guidance: ASC
105-10-65-1
45-1 The aggregate transaction gain or
loss included in determining net income for the
period shall be presented in the financial
statements or disclosed in the notes thereto (see
paragraph 830-20-50-1).
45-2 Certain entities, primarily banks, are dealers in foreign exchange. Although certain gains or losses from dealer transactions may fit the definition of transaction gains or losses in this Subtopic, they may be disclosed as dealer gains or losses rather than as transaction gains or losses.
Aggregate Transaction Gain or Loss
50-1 If not disclosed in the
financial statements as discussed in paragraph
830-20-45-2, the aggregate transaction gain or
loss included in determining net income for the
period shall be disclosed in notes to financial
statements.
Pending Content – Transition Guidance: ASC
105-10-65-1
50-1 If not presented in the financial
statements as discussed in paragraph 830-20-45-1,
the aggregate transaction gain or loss included in
determining net income for the period shall be
disclosed in notes to financial statements.
The disclosure required by ASC 830-20-45-1 should include amounts that (1) may
have been appropriately classified within other
line items (e.g., sales and cost of sales) and,
(2) in the case of highly inflationary economies,
result from remeasurement from the local currency
into the reporting currency (see Section
9.2.3 for further discussion of highly
inflationary economies).
Although ASC 830 is silent on the presentation of transaction gains and losses,
the following are two acceptable alternatives for
presenting such gains and losses in the income
statement:
-
Classify transaction gains and losses related to operational activities (e.g., receivables, payables) in income from operations as a separate line item, and classify transaction gains and losses related to debt in other income and expense.
-
Classify the aggregate transaction gain or loss as a separate line item in either income from operations or other income and expense.
The manner in which transaction gains and losses are presented should be disclosed and applied consistently to all periods presented. In providing such disclosures, an entity should consider its specific facts and circumstances as well as what types of information might be most useful to investors. Such information may include:
- The nature of the transactions that resulted in the gains and losses.
- The classification of the gains and losses by line item within the financial statements.
- Support for the classification chosen for the gains and losses.
- The amount of gains or losses included in each line item.
9.2.1 Transaction Gains and Losses Related to Deferred Taxes
ASC 830-20
Change in Deferred Foreign Tax Assets and Liabilities
45-3 When the reporting
currency (not the foreign currency) is the
functional currency, remeasurement of a reporting
entity’s deferred foreign tax liability or asset
after a change in the exchange rate will result in
a transaction gain or loss that is recognized
currently in determining net income. The preceding
paragraph [ASC 830-20-45-2] requires disclosure of
the aggregate transaction gain or loss included in
determining net income but does not specify how to
display that transaction gain or loss or its
components for financial reporting. See paragraph
830-740-45-1 for further guidance.
Income Tax Consequences of Rate Changes
45-5 Subtopic 740-10 requires income tax expense to be allocated among income from continuing operations, discontinued operations, adjustments of prior periods (or of the opening balance of retained earnings), and direct entries to other equity accounts. Some transaction gains and losses are reported in other comprehensive income. Any income taxes related to those transaction gains and losses shall be allocated to other comprehensive income.
ASC 830-740
45-1 As indicated in
paragraph 830-20-45-3, when the reporting currency
(not the foreign currency) is the functional
currency, remeasurement of an entity’s deferred
foreign tax liability or asset after a change in
the exchange rate will result in a transaction
gain or loss that is recognized currently in
determining net income. Paragraph 830-20-45-1
requires disclosure of the aggregate transaction
gain or loss included in determining net income
but does not specify how to display that
transaction gain or loss or its components for
financial reporting. Accordingly, a transaction
gain or loss that results from remeasuring a
deferred foreign tax liability or asset may be
included in the reported amount of deferred tax
benefit or expense if that presentation is
considered to be more useful. If reported in that
manner, that transaction gain or loss is still
included in the aggregate transaction gain or loss
for the period to be disclosed as required by that
paragraph.
ASC 830-740-45-1 indicates that transaction gains and losses related to
remeasuring deferred tax balances “may be included
in the reported amount of deferred tax benefit or
expense if that presentation is considered to be
more useful.” Entities that select this
presentation method must still include the
transaction gain or loss in “the aggregate
transaction gain or loss for the period to be
disclosed as required by [ASC 830-20-45-1].” See
Deloitte’s Roadmap Income
Taxes for additional guidance on
accounting for deferred taxes.
9.2.2 Gains and Losses Related to Long-Term Intra-Entity Transactions in Separate Financial Statements
The exception for long-term intra-entity transactions that is discussed in
Section 6.4 applies only to the
consolidated entity’s financial statements. A
foreign entity (e.g., a subsidiary) would apply
the general guidance in ASC 830 to its stand-alone
financial statements and would record the
foreign-currency-related gains and losses
associated with such transactions in earnings.
9.2.3 Highly Inflationary Economies
In addition to considering narrative disclosures describing the change to highly
inflationary accounting and the impact it may have
on the financial statements in general, an entity
should consider the impact of such a change on its
transaction gains and losses. Therefore, preparers
should keep in mind that the requirement in ASC
830-20-45-1 to disclose the aggregate transaction
gain or loss presented in the income statement,
including the gain or loss attributable to
remeasurement due to a highly inflationary
economy, still applies.
SEC Considerations
SEC registrants with material operations in a highly inflationary economy should disclose the economy’s status as highly inflationary in their financial statements, even though ASC 830 does not explicitly require such disclosures. Such disclosures should discuss the factors that the entity considered in determining that an economy is highly inflationary as well as the timing of this determination.
Section 6700 of the
SEC Financial Reporting Manual contains requirements for foreign issuers
operating in hyperinflationary environments and addresses the
price-level adjustments that entities need to make when they use a
hyperinflationary currency as their reporting currency.
Registrants should also explain the accounting impact of the designation as highly inflationary and the impact the resulting change in functional currency will have on the entity’s financial reporting.
ASC 830-740
45-2 The deferred taxes
associated with the temporary differences that
arise from a change in functional currency
discussed in paragraph 830-740-25-3 when an
economy ceases to be considered highly
inflationary shall be presented as an adjustment
to the cumulative translation adjustments
component of shareholders’ equity and therefore
shall be recognized in other comprehensive
income.
The above guidance notes that deferred taxes that arise because an economy ceases to be considered highly inflationary should be recognized in OCI.
For additional accounting and disclosure considerations related to highly inflationary economies, see Chapter 7.
9.3 Cumulative Translation Adjustment
ASC 830-30
45-12 If an entity’s functional currency is a foreign currency, translation adjustments result from the process of translating that entity’s financial statements into the reporting currency. Translation adjustments shall not be included in determining net income but shall be reported in other comprehensive income.
As explained in Chapter 5, adjustments that result from the translation of an entity’s financial statements from its functional currency to the reporting currency should be recorded in OCI (i.e., such adjustments do not affect net income).
9.3.1 Noncontrolling Interests and Equity Method Investments
ASC 830-30
45-17 Accumulated translation adjustments attributable to noncontrolling interests shall be allocated to and reported as part of the noncontrolling interest in the consolidated reporting entity.
For investees that are not wholly owned, the presentation of CTA will depend on whether the parent consolidates the foreign entity investee or accounts for it by using the equity method:
9.3.2 Changes in Cumulative Translation Adjustment
ASC 830-30
Analysis of Changes in Cumulative Translation Adjustment
45-18 An analysis of the changes during the period in the accumulated amount of translation adjustments reported in equity shall be provided in any of the following ways:
- In a separate financial statement
- In notes to financial statements
- As part of a statement of changes in equity.
45-19 This accumulated amount in equity might be titled Equity Adjustment from Foreign Currency Translation or given a similar title.
45-20 At a minimum, the
analysis shall disclose all of the following (see
paragraph 830-30-50-1):
-
Beginning and ending amount of cumulative translation adjustments
-
The aggregate adjustment for the period resulting from translation adjustments (see paragraph 830-30-45-12) and gains and losses from certain hedges and intra-entity balances (see paragraph 830-20-35-3).
-
The amount of income taxes for the period allocated to translation adjustments (see paragraph 830-30-45-21)
-
The amounts transferred from cumulative translation adjustments and included in determining net income for the period as a result of the sale or complete or substantially complete liquidation of an investment in a foreign entity (see paragraph 830-30-40-1).
Analysis of Changes in Cumulative Translation Adjustment
50-1 If not provided in a
separate financial statement or as part of a
statement of changes in equity, an analysis of the
changes during the period in the accumulated
amount of translation adjustments reported in
equity shall be provided in notes to financial
statements. At a minimum, the analysis shall
disclose the items enumerated in paragraph
830-30-45-20.
As noted in the guidance above, an entity must provide certain disclosures
analyzing the changes in the CTA. Such an analysis can be presented in (1) a
separate financial statement, (2) the notes to the financial statements, or (3)
a statement of changes in equity. Regardless of the format in which the analysis
is provided, it must contain the items listed in ASC 830-30-45-20.
9.3.3 Income Taxes Recorded in Cumulative Translation Adjustment
ASC 830-30
45-21 Subtopic 740-10 requires income tax expense to be allocated among income from continuing operations, discontinued operations, adjustments of prior periods (or of the opening balance of retained earnings), and direct entries to other equity accounts. All translation adjustments are reported in other comprehensive income. Any income taxes related to those translation adjustments shall be allocated to other comprehensive income. Translation adjustments are accounted for in the same way as temporary differences under the provisions of Subtopic 740-10. If under the requirements of Subtopic 740-30 deferred taxes are not provided for unremitted earnings of a subsidiary, in those instances, deferred taxes shall not be provided on translation adjustments.
Deferred taxes should “not be provided for [the] translation adjustments”
discussed in ASC 830-30-45-21. Specifically, ASC 740-30-25-17 explains that “no
income taxes shall be accrued by the parent entity . . . if sufficient evidence
shows that the subsidiary has invested or will invest the undistributed earnings
indefinitely or that the earnings will be remitted in a tax-free
liquidation.”
Example 9-1
Deferred Taxes Related to Translation
Adjustments
Company N is a domestic corporation with
a wholly owned subsidiary, S, operating in a foreign tax
jurisdiction. The functional currency of S is the local
currency and, historically, no earnings have been
repatriated to N because the parent company considers
its investment to be permanent.
In this case, deferred income tax assets
and liabilities should not be recognized for the
adjustment resulting from translation of S’s financial
statements into USD.
9.4 Exchange Rate Changes
ASC 830-20
Subsequent Rate Changes
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.
Effects of Rate Changes on Results of Operations
50-3 Management is encouraged to supplement the disclosures required by this Subtopic with an analysis and discussion of the effects of rate changes on the reported results of operations. This type of disclosure might include the mathematical effects of translating revenue and expenses at rates that are different from those used in a preceding period as well as the economic effects of rate changes, such as the effects on selling prices, sales volume, and cost structures. The purpose is to assist financial report users in understanding the broader economic implications of rate changes and to compare recent results with those of prior periods.
ASC 830-30
Subsequent Change in Exchange Rate
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.
Subsequent Rate Changes
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.
As indicated in the guidance above, an entity should not adjust its financial statements for a rate change that occurs after the date of its financial statements (except in situations in which there is significant devaluation for subsidiaries reporting on a lag, as discussed in Section 3.3.1). However, disclosures related to such a rate change may be warranted depending on the change’s significance as well as its impact on foreign currency transactions that remain unsettled as of the balance sheet date. Such disclosures may include discussion of the effects of changes in exchange rates on the following:
- Results of operations.
- Selling prices.
- Sales volume.
- Cost structures.
The purpose of such disclosures is to help financial statement users understand the overall effects of changes in exchange rates on an entity’s cash flows and net income. If there are no unsettled foreign currency transactions as of the balance sheet date, an entity is not required to provide such disclosures since any change in exchange rates would only affect subsequent translation adjustments, which do not affect net income or cash flows (i.e., translation adjustments are recorded in equity).
SEC Considerations
If the impact of a change in exchange rates is expected to significantly affect
an SEC registrant’s future cash flows, the
registrant should disclose this fact in its
MD&A.
As with disclosures about the effects of post-balance-sheet rate changes, ASC
830-20-50-3 notes that an entity is “encouraged to
supplement the [required] disclosures” with
additional analysis of the effects that changes in
exchange rates have had on the entity’s operations
within the current reporting period. Such an
analysis may include the effects of changes in
exchange rates on the items listed above along
with the effect of changes on items such as the
translation of revenue and expenses at rates
different from those used in prior periods.
ASC 830-20-50-3 further notes that such supplemental disclosures may “assist
financial report users in understanding the
broader economic implications of rate changes and
to compare recent results with those of prior
periods.”
SEC Considerations
If a foreign government officially changes a fixed exchange rate and this change
causes the local currency to decline with respect to other currencies, the
SEC is likely to expect registrants to include appropriate disclosures about
the event in MD&A. See Section 9.5
for information about disclosures that may be appropriate, depending on an
entity’s particular facts and circumstances.
9.5 Highly Inflationary Economies
The SEC staff continues to focus on accounting and disclosure considerations
related to the foreign currency exchange environment in countries whose economies
(1) are highly inflationary or (2) risk becoming highly inflationary. Registrants
with material operations in an economy at risk for being highly inflationary are
encouraged to closely monitor the economic environment within the country and to
ensure that appropriate processes are in place for identifying relevant inflation
data. Entities with material operations in economies at risk for being highly
inflationary are encouraged to carefully consider the requirements in ASC 275
related to disclosing risks and uncertainties resulting from certain concentrations,
including concentrations associated with foreign operations and therefore with
exposure to foreign exchange risk.
SEC Regulation S-K, Item 303, requires registrants to disclose in their MD&A any known trends, events,
or uncertainties that are reasonably likely to have a material effect on their liquidity, capital resources,
or results of operations. SEC Regulation S-K, Items 305 and 503(c), require registrants to disclose risks,
including risk factors and market risks. The SEC staff has emphasized that registrants should present
tailored risk factors in their filings and avoid using boilerplate language.
The SEC staff has also historically provided informal guidance for registrants with foreign operations that
may be subject to material risks and uncertainties, such as political risks, currency risks, and business
climate and taxation risks. The staff has reminded registrants that the effects on their consolidated
operations of an adverse event related to these risks may be disproportionate to the size of their foreign
operations. Therefore, the staff has historically encouraged registrants to discuss in their MD&A any
trends, risks, and uncertainties related to their operations in individual countries or geographic areas
and possibly to supplement such disclosures with disaggregated financial information about those
operations.
SEC Considerations
The SEC staff has indicated in informal discussions that a registrant should
consider providing additional disclosures, if material, about its operations
if these operations are considered highly inflationary and may have multiple
exchange rates. The following disclosures are consistent with those
recommended by the SEC staff:
-
The overall environment in the highly inflationary economy and its effect on the entity’s financial statements both historically and currently. This disclosure can include information about (1) price controls, inflation, and foreign currency exchange limitations or restrictions; (2) changes in the entity’s revenues and associated costs; and (3) any triggering events, impairment indicators, or impairments.
-
The extent of the entity’s exposure to the highly inflationary operations, including the nature of the entity’s activities in the highly inflationary economy (e.g., imports, manufacturing, and size of operations) and other meaningful financial information, such as disaggregated financial information about the highly inflationary operations (e.g., summarized balance sheets, income statements, and cash flow statements).
-
A description of the possible effects of the currency exchange limitations or government restrictions on the entity’s operations, including how such limitations or restrictions may affect the entity’s liquidity, cash flows, or debt covenants. An entity should also describe how the existence of such limitations or restrictions affects the application of the entity’s accounting policies.
-
The exchange rate(s) used for remeasurement and the basis for judgments applied in determining the rate(s), including:
-
If multiple exchange rates are used, how each rate was determined, what transactions each rate applies to, and the relative significance of the various exchange rates.
-
Any volume restrictions or limitations on a particular exchange rate.
-
Any assumptions used in the determination of the appropriate exchange rate.
-
Any risks or uncertainties related to the entity’s ability to settle at the exchange rate selected.
-
A description of the use of any exchange rates that differ from those used in prior reporting periods.
-
In addition to the above, an entity should consider the following
disclosures:
-
The impact of remeasurement on the financial statements, including (1) the amount of any foreign exchange gain or loss that arises from using the various rates for remeasurement and (2) the financial statement line item in which the gain or loss is recorded.
-
If applicable, ongoing disclosure of variable interests, if any, in foreign VIEs in accordance with the disclosure requirements of ASC 810.
For more information about the recent scrutiny related to highly inflationary economies, see Chapter 7.
9.6 Statement of Cash Flows
ASC
830-230
45-1 A statement of cash flows
of an entity with foreign currency transactions or foreign
operations shall report the reporting currency equivalent of
foreign currency cash flows using the exchange rates in
effect at the time of the cash flows. An appropriately
weighted average exchange rate for the period may be used
for translation if the result is substantially the same as
if the rates at the dates of the cash flows were used. (That
is, paragraph 830-30-45-3 applies to cash receipts and cash
payments.) The statement of cash flows shall report the
effect of exchange rate changes on cash, cash equivalents,
and amounts generally described as restricted cash or
restricted cash equivalents held in foreign currencies as a
separate part of the reconciliation of the change in the
total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents
during the period. See Example 1 (paragraph 830-230-55-1)
for an illustration of this guidance.
Entities may have transactions that are denominated in a foreign
currency or businesses that operate in foreign currency environments. For
transactions denominated in a foreign currency, an entity should report the cash
flow effects on changes in cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents by using the exchange rates in
effect on the date of such cash flows. As noted above, instead of using the actual
exchange rate on the date of a foreign currency transaction, an entity may use an
“appropriately weighted average exchange rate” for translation “if the result is
substantially the same as if the rates at the dates of the cash flows were
used.”
A consolidated entity with operations whose functional currencies
are foreign currencies may use the following approach when preparing its
consolidated statement of cash flows:
- Prepare a separate statement of cash flows for each foreign entity by using the operation’s functional currency.
- Translate the stand-alone cash flow statement prepared in the functional currency of each foreign entity into the reporting currency of the parent entity.
- Consolidate the individual translated statements of cash flows.
The effects of exchange rate changes, or translation gains and
losses, are not the same as the effects of transaction gains and losses and should
not be presented or calculated in the same manner. Effects of exchange rate changes
may directly affect cash receipts and payments but do not directly result in cash
flows themselves.
Because unrealized transaction gains and losses arising from the
remeasurement of foreign-currency-denominated monetary assets and liabilities on the
balance sheet date are included in the determination of net income, such amounts
should be presented as a reconciling item between net income and net cash from
operating activities (either on the face of the statement under the indirect method
or in a separate schedule under the direct method). Subsequently, any cash flows
arising from the settlement of the foreign-currency-denominated asset and liability
should be presented in the statement of cash flows as an operating, investing, or
financing activity on the basis of the nature of such cash flows.
Translation gains and losses, however, are recognized in OCI and are
not included in cash flows from operating, investing, or financing activities.
The effects of exchange rate changes on cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents should
be shown as a separate line item in the statement of cash flows as part of the
reconciliation of beginning and ending cash balances. This issue was discussed in paragraph 101 of the Basis for Conclusions of FASB Statement 95, which stated, in
part:
The effects of exchange rate
changes on assets and liabilities denominated in foreign currencies, like
those of other price changes, may affect the amount of a cash receipt or
payment. But exchange rate changes do not themselves
give rise to cash flows, and their effects on items other than cash thus
have no place in a statement of cash flows. To achieve its
objective, a statement of cash flows should reflect the reporting currency
equivalent of cash receipts and payments that occur in a foreign currency.
Because the effect of exchange rate changes on the reporting currency
equivalent of cash held in foreign currencies affects the change in an
enterprise’s cash balance during a period but is not a cash receipt or
payment, the Board decided that the effect of exchange
rate changes on cash should be reported as a separate item in the
reconciliation of beginning and ending balances of cash. [Emphasis
added]
In a manner consistent with the implementation guidance in ASC
830-230-55-15, the effect of exchange rate changes on cash and cash equivalents is
the sum of the following two components:
-
For each foreign operation, the difference between the exchange rates used in translating functional currency cash flows and the exchange rate at year-end multiplied by the net cash flow activity for the period measured in the functional currency.
-
The fluctuation in the exchange rates from the beginning of the year to the end of the year multiplied by the beginning cash balance denominated in currencies other than the reporting currency.
Example 1 in ASC 830-230-55-1 through 55-15 illustrates the
computation of the effect of exchange rate changes on cash:
ASC
830-230
Illustrations
Example 1: Statement
of Cash Flows for Manufacturing Entity With Foreign
Operations
55-1 This
Example illustrates a statement of cash flows under the
direct method for a manufacturing entity with foreign
operations. The illustrations of the reconciliation of net
income to net cash provided by operating activities may
provide detailed information in excess of that required for
a meaningful presentation. Other formats or levels of detail
may be appropriate for particular circumstances.
55-2 The
following is a consolidating statement of cash flows for the
year ended December 31, 19X1, for Entity F, a multinational
U.S. corporation engaged principally in manufacturing
activities, which has two wholly owned foreign subsidiaries
— Subsidiary A and Subsidiary B. For Subsidiary A, the local
currency is the functional currency. For Subsidiary B, which
operates in a highly inflationary economy, the U.S. dollar
is the functional currency.
55-3 The
entity would make the following disclosure.
Cash in excess of daily requirements is invested in
marketable securities consisting of U.S. Treasury
bills with maturities of three months or less. Such
investments are deemed to be cash equivalents for
purposes of the statement of cash flows.
55-4 Summarized in the
following tables is financial information for the current
year for Entity F, which provides the basis for the
statement of cash flows presented in paragraph
830-230-55-2.
55-5 The
U.S. dollar equivalents of one unit of local currency
applicable to Subsidiary A and to Subsidiary B are as
follows.
55-6 The computation of the
weighted-average exchange rate for Subsidiary A excludes the
effect of Subsidiary A’s sale of inventory to the parent
entity at the beginning of the year discussed in paragraph
830-230-55-10(a).
55-7
Comparative statements of financial position for the parent
entity and for each of the foreign subsidiaries are as
follows.
55-8
Statements of income in local currency and U.S. dollars for
each of the foreign subsidiaries are as follows.
55-9 All of
the following transactions were entered into during the year
by the parent entity and are reflected in the preceding
financial statements:
- The parent entity invested cash in excess of daily requirements in U.S. Treasury bills. Interest earned on such investments totaled USD 35.
- The parent entity sold excess property with a net book value of USD 35 for USD 150.
- The parent entity’s capital expenditures totaled USD 450.
- The parent entity wrote down to its estimated net realizable value of USD 25 a facility with a net book value of USD 75.
- The parent entity’s short-term debt consisted of commercial paper with maturities not exceeding 60 days.
- The parent entity repaid long-term notes of USD 200.
- The parent entity’s depreciation totaled USD 340, and amortization of intangible assets totaled USD 10.
- The parent entity’s provision for income taxes included deferred taxes of USD 90.
- Because of a change in product design, the parent entity purchased all of Subsidiary A’s beginning inventory for its book value of USD 160. All of the inventory was subsequently sold by the parent entity.
- The parent entity received a dividend of USD 22 from Subsidiary A. The dividend was credited to the parent entity’s income.
- The parent entity purchased from Subsidiary B USD 270 of merchandise of which USD 45 remained in the parent entity’s inventory at year-end. Intra-entity profit on the remaining inventory totaled USD 15.
- The parent entity loaned USD 15, payable in U.S. dollars, to Subsidiary B.
- Entity F paid dividends totaling USD 120 to shareholders.
55-10 All
of the following transactions were entered into during the
year by Subsidiary A and are reflected in the above
financial statements. The U.S. dollar equivalent of the
local currency amount based on the exchange rate at the date
of each transaction is included. Except for the sale of
inventory to the parent entity (the transaction in [a]),
Subsidiary A’s sales and purchases and operating cash
receipts and payments occurred evenly throughout the
year.
- Because of a change in product design, Subsidiary A sold all of its beginning inventory to the parent entity for its book value of LC 400 (USD 160).
- Subsidiary A sold equipment for its book value of LC 275 (USD 116) and purchased new equipment at a cost of LC 600 (USD 258).
- Subsidiary A issued an additional LC 175 (USD 75) of 30-day notes and renewed the notes at each maturity date.
- Subsidiary A issued long-term debt of LC 400 (USD 165) and repaid long-term debt of LC 250 (USD 105).
- Subsidiary A paid a dividend to the parent entity of LC 50 (USD 22).
55-11 The
following transactions were entered into during the year by
Subsidiary B and are reflected in the preceding financial
statements. The U.S. dollar equivalent of the local currency
amount based on the exchange rate at the date of each
transaction is included. Subsidiary B’s sales and operating
cash receipts and payments occurred evenly throughout the
year. For convenience, all purchases of inventory were based
on the weighted-average exchange rate for the year.
Subsidiary B uses the first-in, first-out (FIFO) method of
inventory valuation.
- Subsidiary B had sales to the parent entity as follows.
- Subsidiary B sold equipment with a net book value of LC 200 (USD 39) for LC 350 (USD 14). New equipment was purchased at a cost of LC 500 (USD 15).
- Subsidiary B borrowed USD 15 (LC 500), payable in U.S. dollars, from the parent entity.
- Subsidiary B repaid LC 1,000 (USD 35) of long-term debt.
55-12
Statements of cash flows in the local currency and in U.S.
dollars for Subsidiary A and Subsidiary B are as
follows.
55-13 A
reconciliation of net income to net cash provided by
operating activities follows.
55-14 The following is the
computation of cash received from customers and cash paid to
suppliers and employees as reported in the consolidating
statement of cash flows for Entity F appearing in paragraph
830-230-55-2.
55-15 The
following is the computation of the effect of exchange rate
changes on cash for Subsidiary A and Subsidiary B.
9.7 Other Disclosure Considerations
Entities should also consider the foreign currency presentation and disclosure requirements in ASC topics other than ASC 830 and, if applicable, those in SEC guidance.
9.7.1 SEC Considerations
The SEC staff has historically encouraged registrants to provide supplemental disclosures about how the reporting entity is affected by foreign operations and foreign currencies. For instance, in FRR 6 (codified in Section 501.09 of the Codification of Financial Reporting Policies), the staff gave several examples of the types of disclosures registrants should consider including in their MD&A (although the staff did not specify the preferred nature and location of such disclosures). These supplemental disclosures include:
- “[I]nformation enabling an evaluation of the amounts and certainty of cash flows from operations and a registrant’s ability to generate adequate amounts of cash to meet its need for cash (liquidity) as well as an assessment of the impact of events that have had, or may have, a material effect on trends of operating results.”
- “[D]isplay of net investments by major functional currency.”
- “[A]nalysis of the translation component of equity (either by significant functional currency or by geographical areas used for segment disclosure purposes).”
- “[F]unctional currencies used to measure significant foreign operations or the degree of exposure to exchange rate risks (which exists for all companies engaged in foreign operations, regardless of their functional currencies), in order to enable investors to assess the impact of exchange rate changes on the reporting entity.”
In addition, the staff cited two examples of instances in which registrants should consider providing additional disclosures:
- When there is an “indication that all or some of [a foreign operation’s] cash flows are generally not available to meet the company’s other short-term needs for cash.” Such disclosures should be disaggregated enough to “meaningfully address liquidity and capital resource considerations,” and entities should especially consider disclosing the nature of their intra-entity financing in such situations.
- When the reporting entity has “significant foreign operations in highly inflationary economies.”
Further, the SEC staff has indicated1 that, when providing quantitative disclosures regarding foreign currency
adjustments, registrants should:
-
“[R]eview [MD&A] and the notes to financial statements to ensure that disclosures are sufficient to inform investors of the nature and extent of the currency risks to which the registrant is exposed and to explain the effects of changes in exchange rates on its financial statements.”
-
Describe in their MD&A “any material effects of changes in currency exchange rates on reported revenues, costs, and business practices and plans.”
-
Identify “the currencies of the environments in which material business operations are conducted [when] exposures are material.”
-
“[Q]uantify the extent to which material trends in amounts are attributable to changes in the value of the reporting currency relative to the functional currency of the underlying operations [and analyze] any materially different trends in operations or liquidity that would be apparent if reported in the functional currency.”
-
Identify, to the extent they are material, “unhedged monetary assets, liabilities or commitments denominated in currencies other than the operation’s functional currency, and strategies for management of currency risk.”
In assessing whether it needs to provide disaggregated financial information about its foreign operations in MD&A, a registrant should take into account more than just the percentage of consolidated revenues, net income, or assets contributed by foreign operations. The registrant also should consider how the foreign operations might affect the consolidated entity’s liquidity. For example, a foreign operation that holds significant liquid assets may be exposed to exchange-rate fluctuations or restrictions that could affect the registrant’s overall liquidity.
9.7.2 Non-GAAP Measures
Constant currency is a method used to eliminate the effects of exchange rate fluctuations of international operations in a registrant’s determination of financial performance. For example, when presenting its MD&A, a registrant with material operations in various countries should disclose the impact of material exchange rates. To do so, the registrant may use a constant exchange rate between periods for translation, which would remove the effect of fluctuations in foreign exchange rates.
The presentation of financial results in a constant currency is considered a non-GAAP measure.
C&DIs — Non-GAAP Financial
Measures
Question
104.06
Question:
Company X has operations in various foreign countries
where the local currency is used to prepare the
financial statements which are translated into the
reporting currency under the applicable accounting
standards. In preparing its MD&A, Company X will
explain the reasons for changes in various financial
statement captions. A portion of these changes will be
attributable to changes in exchange rates between
periods used for translation. Company X wants to isolate
the effect of exchange rate differences and will present
financial information in a constant currency — e.g.,
assume a constant exchange rate between periods for
translation. Would such a presentation be considered a
non-GAAP measure under Regulation G and Item 10(e) of
Regulation S-K?
Answer: Yes.
Company X may comply with the reconciliation
requirements of Regulation G and Item 10(e) by
presenting the historical amounts and the amounts in
constant currency and describing the process for
calculating the constant currency amounts and the basis
of presentation. [Jan. 11, 2010]
Since constant-currency amounts are non-GAAP measures, the registrant should include the appropriate non-GAAP disclosures to isolate the effects of the exchange rate differences for (1) the historical amounts and (2) the amounts in constant currency. The disclosure of the non-GAAP measure should describe both the basis of presentation and how the constant-currency amounts were computed. Note that if a registrant only discloses the impact of exchange rates as part of its explanation of the period-to-period fluctuation between two GAAP amounts, such disclosure would not constitute a non-GAAP measure (e.g., foreign currency fluctuations resulted in $XX of the change in net revenue).
For more information about non-GAAP measures, see Deloitte’s Roadmap Non-GAAP Financial Measures and
Metrics.
9.7.3 Risks and Uncertainties
ASC 275-10
50-18 Concentrations,
including known group concentrations, described below
require disclosure if they meet the criteria of
paragraph 275-10-50-16. (Group concentrations exist if a
number of counterparties or items that have similar
economic characteristics collectively expose the
reporting entity to a particular kind of risk.) Some
concentrations may fall into more than one of the
following categories:
-
Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor, or contributor. The potential for the severe impact can result, for example, from total or partial loss of the business relationship. For purposes of this Subtopic, it is always considered at least reasonably possible that any customer, grantor, or contributor will be lost in the near term.
-
Concentrations in revenue from particular products, services, or fund-raising events. The potential for the severe impact can result, for example, from volume or price changes or the loss of patent protection for the particular source of revenue.
-
Concentrations in the available sources of supply of materials, labor, or services, or of licenses or other rights used in the entity’s operations. The potential for the severe impact can result, for example, from changes in the availability to the entity of a resource or a right.
-
Concentrations in the market or geographic area in which an entity conducts its operations. The potential for the severe impact can result, for example, from negative effects of the economic and political forces within the market or geographic area. For purposes of this Subtopic, it is always considered at least reasonably possible that operations located outside an entity’s home country will be disrupted in the near term.
50-19 Concentrations of financial instruments, and other concentrations not described in the preceding paragraph, are not addressed in this Subtopic. However, these other concentrations may be required to be disclosed pursuant to other Topics, such as Subtopic 825-10.
50-20 Disclosure of
concentrations meeting the criteria of paragraph
275-10-50-16 shall include information that is adequate
to inform users of the general nature of the risk
associated with the concentration. For those
concentrations of labor (see paragraph 275-10-50-18(c))
subject to collective bargaining agreements and
concentrations of operations located outside of the
entity’s home country (see paragraph 275-10-50-18(d))
that meet the criteria in paragraph 275-10-50-16, the
following specific disclosures are required:
-
For labor subject to collective bargaining agreements, disclosure shall include both the percentage of the labor force covered by a collective bargaining agreement and the percentage of the labor force covered by a collective bargaining agreement that will expire within one year.
-
For operations located outside the entity’s home country, disclosure shall include the carrying amounts of net assets and the geographic areas in which they are located.
This Subtopic does not, however, prohibit entities from also stating in disclosures of concentrations related to customers, grantors, or contributors or operations located outside the entity’s home country that the entity does not expect that the business relationship will be lost or does not expect that the foreign operations will be disrupted if such is the case.
50-21 Adequate information about some concentrations may already be presented in other parts of the financial statements. For example, adequate information about assets or operations located outside the entity’s home country may be included in disclosures made to comply with Subtopic 280-10. In accordance with the guidance in this Subtopic, such information need not be repeated.
As noted above, ASC 275 requires entities to provide disclosures about risks and
uncertainties resulting from certain concentrations, including concentrations
associated with foreign operations and therefore with exposure to foreign
exchange risk. In addition, SEC Regulation S-K, Item 303, requires SEC
registrants to disclose in their MD&A any known trends, events, or
uncertainties that are reasonably likely to have a material effect on their
liquidity, capital resources, or results of operations.
SEC Considerations
The SEC staff has also historically provided informal
guidance for registrants with foreign operations that may be subject to
material risks and uncertainties, such as political risks, currency
risks, and business climate and taxation risks. The staff has reminded
registrants that the effects on their consolidated operations of an
adverse event related to these risks may be disproportionate to the size
of their foreign operations. Therefore, the staff has historically
encouraged registrants to discuss in their MD&A any trends, risks,
and uncertainties related to their operations in individual countries or
geographic areas and to supplement such disclosures with disaggregated
financial information about those operations.
In addition, SEC Regulation S-K, Items 305 and 503(c),
require registrants to disclose risks, including risk factors and market
risks. The SEC staff has emphasized that registrants should present
tailored risk factors in their filings and avoid using boilerplate
language. Registrants should consider whether to provide more specific
discussion and enhanced explanations of how the risks could materially
affect their business. This discussion may be supplemented with
quantitative information that puts the risks in context.