ORIGINAL PRONOUNCEMENTS - FASB

Statement of Financial AccountingStandards No. 52

Foreign Currency Translation

Financial Accounting Standards Board

ORIGINAL

PRONOUNCEMENTS

AS AMENDED

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Statement of Financial Accounting Standards No. 52Foreign Currency Translation

STATUS

Issued: December 1981

Effective Date: For fiscal years beginning on or after December 15, 1982

Affects: Amends ARB 43, Chapter 12, paragraph 5Deletes ARB 43, Chapter 12, paragraphs 7 and 10 through 22Deletes APB 6, paragraph 18Amends APB 22, paragraph 13Supersedes FAS 1Supersedes FAS 8Supersedes FAS 20Supersedes FIN 15Supersedes FIN 17

Affected by: Paragraph 13 amended by FAS 130, paragraph 29Paragraph 14A added by FAS 133, paragraph 527(a)Paragraphs 15, 16, 31(b), and 162 amended by FAS 133, paragraphs 527(b), 527(c), 527(g), and

527(h), respectivelyParagraphs 17 through 19 deleted by FAS 133, paragraph 527(d)Paragraph 21 replaced by FAS 133, paragraph 527(e)Paragraphs 22 and 23 amended by FAS 96, paragraph 204, and FAS 109, paragraph 287Paragraph 24 amended by FAS 96, paragraph 204; FAS 109, paragraph 287; and FAS 135,paragraph 4(l)

Paragraphs 26, 31, 34, and 46 amended by FAS 135, paragraph 4(l)Paragraph 30 amended by FAS 133, paragraph 527(f), and FAS 161, paragraph 4Paragraph 45 amended by FAS 154, paragraph C10Paragraph 48 amended by FAS 96, paragraph 205(p); FAS 109, paragraph 288(r); and FAS 142,paragraph D6

Paragraph 101 effectively amended by FAS 141, paragraphs 44 through 46, and amended byFAS 141(R), paragraph E15, and FAS 164, paragraph E6

Other Interpretive Pronouncement: FIN 37

AICPAAccounting Standards Executive Committee (AcSEC)

Related Pronouncement: SOP 93-4

Issued Discussed by FASB Emerging Issues Task Force (EITF)

Affects: No EITF Issues

Interpreted by: Paragraph 11 interpreted by EITF Topic No. D-55Paragraph 13 interpreted by EITF Issue No. 01-5Paragraph 15 interpreted by EITF Issue No. 96-15Paragraph 21 interpreted by EITF Issue No. 97-7Paragraph 26 interpreted by EITF Topic No. D-12Paragraph 46 interpreted by EITF Issues No. 92-4 and 92-8 and Topic No. D-56

Related Issues: EITF Issues No. 87-12, 88-18, and 96-11 and Topics No. D-4 and D-71

FAS52

FAS52–1

SUMMARY

Application of this Statement will affect financial reporting of most companies operating in foreign coun-tries. The differing operating and economic characteristics of varied types of foreign operations will be distin-guished in accounting for them. Adjustments for currency exchange rate changes are excluded from net in-come for those fluctuations that do not impact cash flows and are included for those that do. The requirementsreflect these general conclusions:

• The economic effects of an exchange rate change on an operation that is relatively self-contained andintegrated within a foreign country relate to the net investment in that operation. Translation adjustmentsthat arise from consolidating that foreign operation do not impact cash flows and are not included in netincome.

• The economic effects of an exchange rate change on a foreign operation that is an extension of the parent’sdomestic operations relate to individual assets and liabilities and impact the parent’s cash flows directly.Accordingly, the exchange gains and losses in such an operation are included in net income.

• Contracts, transactions, or balances that are, in fact, effective hedges of foreign exchange risk will be ac-counted for as hedges without regard to their form.

More specifically, this Statement replaces FASB Statement No. 8, Accounting for the Translation of For-eign Currency Transactions and Foreign Currency Financial Statements, and revises the existing accountingand reporting requirements for translation of foreign currency transactions and foreign currency financial state-ments. It presents standards for foreign currency translation that are designed to (1) provide information that isgenerally compatible with the expected economic effects of a rate change on an enterprise’s cash flows andequity and (2) reflect in consolidated statements the financial results and relationships as measured in the pri-mary currency in which each entity conducts its business (referred to as its “functional currency”).

An entity’s functional currency is the currency of the primary economic environment in which that entityoperates. The functional currency can be the dollar or a foreign currency depending on the facts. Normally, itwill be the currency of the economic environment in which cash is generated and expended by the entity. Anentity can be any form of operation, including a subsidiary, division, branch, or joint venture. The Statementprovides guidance for this key determination in which management’s judgment is essential in assessing thefacts.

A currency in a highly inflationary environment (3-year inflation rate of approximately 100 percent ormore) is not considered stable enough to serve as a functional currency and the more stable currency of thereporting parent is to be used instead.

The functional currency translation approach adopted in this statement encompasses:

a. Identifying the functional currency of the entity’s economic environmentb. Measuring all elements of the financial statements in the functional currencyc. Using the current exchange rate for translation from the functional currency to the reporting currency, if

they are differentd. Distinguishing the economic impact of changes in exchange rates on a net investment from the impact of

such changes on individual assets and liabilities that are receivable or payable in currencies other than thefunctional currency.

Translation adjustments are an inherent result of the process of translating a foreign entity’s financial state-ments from the functional currency to U.S. dollars. Translation adjustments are not included in determining netincome for the period but are disclosed and accumulated in a separate component of consolidated equity untilsale or until complete or substantially complete liquidation of the net investment in the foreign entity takesplace.

Transaction gains and losses are a result of the effect of exchange rate changes on transactions denominatedin currencies other than the functional currency (for example, a U.S. company may borrow Swiss francs or aFrench subsidiary may have a receivable denominated in kroner from a Danish customer). Gains and losses onthose foreign currency transactions are generally included in determining net income for the period in whichexchange rates change unless the transaction hedges a foreign currency commitment or a net investment in aforeign entity. Intercompany transactions of a long-term investment nature are considered part of a parent’s netinvestment and hence do not give rise to gains or losses.

FAS52 FASB Statement of Standards

FAS52–2

Statement of Financial Accounting Standards No. 52

Foreign Currency Translation

CONTENTS

ParagraphNumbers

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1− 3Standards of Financial Accounting and Reporting:

Objectives of Translation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4The Functional Currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5− 10The Functional Currency in Highly Inflationary Economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Translation of Foreign Currency Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12− 14Foreign Currency Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14A− 16Forward Exchange Contracts [Deleted]Transaction Gains and Losses to Be Excluded from Determination of Net Income . . . . . . . . . . . . . . 20Hedges of Firm Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Income Tax Consequences of Rate Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22− 24Elimination of Intercompany Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26− 28Use of Averages or Other Methods of Approximation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30− 32Effective Date and Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33− 38

Appendix A: Determination of the Functional Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39− 46Appendix B: Remeasurement of the Books of Record into the Functional Currency . . . . . . . . . . . . . . . . 47− 54Appendix C: Basis for Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55−149Appendix D: Background Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150−161Appendix E: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

INTRODUCTION

1. FASB Statement No. 8, Accounting for the Trans-lation of Foreign Currency Transactions and ForeignCurrency Financial Statements, was issued in Octo-ber 1975 and was effective for fiscal years that beganon or after January 1, 1976. In May 1978, the Boardissued an invitation for public comment on State-ments 1−12, each of which had been in effect for atleast two years. Foreign currency translation* wasthe subject of most of the comments received. InJanuary 1979, the Board added to its agenda a projectto reconsider Statement 8. This Statement is the re-sult of that project.

2. This Statement establishes revised standards of fi-nancial accounting and reporting for foreign cur-rency transactions in financial statements of a re-

porting enterprise (hereinafter, enterprise). It alsorevises the standards for translating foreign currencyfinancial statements (hereinafter, foreign currencystatements) that are incorporated in the financialstatements of an enterprise by consolidation, combi-nation, or the equity method of accounting. Transla-tion of financial statements from one currency to an-other for purposes other than consolidation,combination, or the equity method is beyond thescope of this Statement. For example, this Statementdoes not cover translation of the financial statementsof an enterprise from its reporting currency into an-other currency for the convenience of readers accus-tomed to that other currency.

3. This Statement supersedes FASB StatementNo. 8, Accounting for the Translation of Foreign

*Terms defined in the glossary (Appendix E) are in boldface type the first time they appear in this Statement.

FAS52Foreign Currency Translation

FAS52–3

Currency Transactions and Foreign Currency Finan-cial Statements,1 FASB Statement No. 20, Account-ing for Forward Exchange Contracts, FASB Inter-pretation No. 15, Translation of Unamortized PolicyAcquisition Costs by a Stock Life Insurance Com-pany, and FASB Interpretation No. 17, Applying theLower of Cost or Market Rule in Translated Finan-cial Statements.

STANDARDS OF FINANCIALACCOUNTINGAND REPORTING

Objectives of Translation

4. Financial statements are intended to present infor-mation in financial terms about the performance, fi-nancial position, and cash flows of an enterprise. Forthis purpose, the financial statements of separate en-tities within an enterprise, which may exist and oper-ate in different economic and currency environments,are consolidated and presented as though they werethe financial statements of a single enterprise. Be-cause it is not possible to combine, add, or subtractmeasurements expressed in different currencies, it isnecessary to translate into a single reporting cur-rency2 those assets, liabilities, revenues, expenses,gains, and losses that are measured or denominatedin a foreign currency.3 However, the unity pre-sented by such translation does not alter the underly-ing significance of the results and relationships of theconstituent parts of the enterprise. It is only throughthe effective operation of its constituent parts that theenterprise as a whole is able to achieve its purpose.Accordingly, the translation of the financial state-ments of each component entity of an enterpriseshould accomplish the following objectives:

a. Provide information that is generally compatiblewith the expected economic effects of a ratechange on an enterprise’s cash flows and equity

b. Reflect in consolidated statements the financialresults and relationships of the individual consoli-dated entities as measured in their functionalcurrencies in conformity with U.S. generally ac-cepted accounting principles.

The Functional Currency

5. The assets, liabilities, and operations of a foreignentity shall be measured using the functional cur-rency of that entity. An entity’s functional currency isthe currency of the primary economic environment inwhich the entity operates; normally, that is the cur-rency of the environment in which an entity primarilygenerates and expends cash. Appendix A providesguidance for determination of the functional cur-rency. The economic factors cited in Appendix A,and possibly others, should be considered both indi-vidually and collectively when determining the func-tional currency.

6. For an entity with operations that are relativelyself-contained and integrated within a particularcountry, the functional currency generally would bethe currency of that country. However, a foreign enti-ty’s functional currency might not be the currency ofthe country in which the entity is located. For ex-ample, the parent’s currency generally would be thefunctional currency for foreign operations that are adirect and integral component or extension of theparent company’s operations.

7. An entity might have more than one distinct andseparable operation, such as a division or branch, in

1The following pronouncements, which were superseded or amended by Statement 8, are also superseded or amended by this Statement: para-graphs 7 and 10–22 of Chapter 12, “Foreign Operations and Foreign Exchange,” of ARB No. 43; paragraph 18 of APB Opinion No. 6, Status ofAccounting Research Bulletins; and FASB Statement No. 1, Disclosure of Foreign Currency Translation Information. The last sentence of para-graph 5 of ARB 43, Chapter 12, is amended to delete “and they should be reserved against to the extent that their realization in dollars appears tobe doubtful,” and paragraph 13 of APB Opinion No. 22, Disclosure of Accounting Policies, is amended to delete “translation of foreign curren-cies” as an example of disclosure “commonly required with respect to accounting policies.”2For convenience, this Statement assumes that the enterprise uses the U.S. dollar (dollar) as its reporting currency. However, a currency otherthan the dollar may be the reporting currency in financial statements that are prepared in conformity with U.S. generally accepted accountingprinciples. For example, a foreign enterprise may report in its local currency in conformity with U.S. generally accepted accounting principles.If so, the requirements of this Statement apply.3To measure in foreign currency is to quantify an attribute of an item in a unit of currency other than the reporting currency.Assets and liabilitiesare denominated in a foreign currency if their amounts are fixed in terms of that foreign currency regardless of exchange rate changes.An asset orliability may be both measured and denominated in one currency, or it may be measured in one currency and denominated in another. To illus-trate: Two foreign branches of a U.S. company, one Swiss and one German, purchase identical assets on credit from a Swiss vendor at identicalprices stated in Swiss francs. The German branch measures the cost (an attribute) of that asset in German marks. Although the correspondingliability is also measured in marks, it remains denominated in Swiss francs since the liability must be settled in a specified number of Swissfrancs. The Swiss branch measures the asset and liability in Swiss francs. Its liability is both measured and denominated in Swiss francs. Al-though assets and liabilities can be measured in various currencies, rights to receive or obligations to pay fixed amounts of a currency are, bydefinition, denominated in that currency.


FAS52–4

which case each operation may be considered a sepa-rate entity. If those operations are conducted in differ-ent economic environments, they might have differ-ent functional currencies.

8. The functional currency (or currencies) of an en-tity is basically a matter of fact, but in some instancesthe observable facts will not clearly identify a singlefunctional currency. For example, if a foreign entityconducts significant amounts of business in two ormore currencies, the functional currency might notbe clearly identifiable. In those instances, the eco-nomic facts and circumstances pertaining to a par-ticular foreign operation shall be assessed in relationto the Board’s stated objectives for foreign currencytranslation (paragraph 4). Management’s judgmentwill be required to determine the functional curren-cy in which financial results and relationships aremeasured with the greatest degree of relevance andreliability.

9. Once the functional currency for a foreign entityis determined, that determination shall be used con-sistently unless significant changes in economic factsand circumstances indicate clearly that the functionalcurrency has changed. Previously issued financialstatements shall not be restated for any change in thefunctional currency.

10. If an entity’s books of record are not maintainedin its functional currency, remeasurement into thefunctional currency is required. That remeasurementis required before translation into the reporting cur-rency. If a foreign entity’s functional currency is thereporting currency, remeasurement into the reportingcurrency obviates translation. The remeasurementprocess is intended to produce the same result as ifthe entity’s books of record had been maintained inthe functional currency. The remeasurement of andsubsequent accounting for transactions denominatedin a currency other than the functional currency shallbe in accordance with the requirements of this State-ment (paragraphs 15 and 16). Appendix B providesguidance for remeasurement into the functionalcurrency.

The Functional Currency in Highly InflationaryEconomies

11. The financial statements of a foreign entity in ahighly inflationary economy shall be remeasured asif the functional currency were the reporting cur-rency. Accordingly, the financial statements of thoseentities shall be remeasured into the reporting cur-

rency according to the requirements of paragraph 10.For the purposes of this requirement, a highly infla-tionary economy is one that has cumulative inflationof approximately 100 percent or more over a 3-yearperiod.

Translation of Foreign Currency Statements

12. All elements of financial statements shall betranslated by using a current exchange rate. For as-sets and liabilities, the exchange rate at the balancesheet date shall be used. For revenues, expenses,gains, and losses, the exchange rate at the dates onwhich those elements are recognized shall be used.Because translation at the exchange rates at the datesthe numerous revenues, expenses, gains, and lossesare recognized is generally impractical, an appropri-ately weighted average exchange rate for the periodmay be used to translate those elements.

13. If an entity’s functional currency is a foreign cur-rency, translation adjustments result from the proc-ess of translating that entity’s financial statementsinto the reporting currency. Translation adjustmentsshall not be included in determining net income butshall be reported in other comprehensive income.

14. Upon sale or upon complete or substantiallycomplete liquidation of an investment in a foreignentity, the amount attributable to that entity and accu-mulated in the translation adjustment component ofequity shall be removed from the separate compo-nent of equity and shall be reported as part of the gainor loss on sale or liquidation of the investment for theperiod during which the sale or liquidation occurs.

Foreign Currency Transactions

14A. FASB Statement No. 133, Accounting for De-rivative Instruments and Hedging Activities, ad-dresses the accounting for freestanding foreign cur-rency derivatives and certain foreign currencyderivatives embedded in other instruments. ThisStatement does not address the accounting for deriva-tive instruments.

15. Foreign currency transactions are transactionsdenominated in a currency other than the entity’sfunctional currency. Foreign currency transactionsmay produce receivables or payables that are fixed interms of the amount of foreign currency that will bereceived or paid.Achange in exchange rates betweenthe functional currency and the currency in which atransaction is denominated increases or decreases the


FAS52–5

expected amount of functional currency cash flowsupon settlement of the transaction. That increase ordecrease in expected functional currency cash flowsis a foreign currency transaction gain or loss thatgenerally shall be included in determining net in-come for the period in which the exchange ratechanges. Likewise, a transaction gain or loss (meas-ured from the transaction date or the most recent in-tervening balance sheet date, whichever is later) real-ized upon settlement of a foreign currencytransaction generally shall be included in determin-ing net income for the period in which the transactionis settled. The exceptions to this requirement for in-clusion in net income of transaction gains and lossesare set forth in paragraph 20 and pertain to certain in-tercompany transactions and to transactions that aredesignated as, and effective as, economic hedges ofnet investments.

16. For other than derivative instruments (State-ment 133), the following shall apply to all for-eign currency transactions of an enterprise and itsinvestees:

a. At the date the transaction is recognized, each as-set, liability, revenue, expense, gain, or loss aris-ing from the transaction shall be measured andrecorded in the functional currency of the record-ing entity by use of the exchange rate in effect atthat date (paragraphs 26−28).

b. At each balance sheet date, recorded balancesthat are denominated in a currency other than thefunctional currency of the recording entity shallbe adjusted to reflect the current exchange rate.

17−19. [These paragraphs have been deleted. SeeStatus page.]

Transaction Gains and Losses to Be Excludedfrom Determination of Net Income

20. Gains and losses on the following foreign cur-rency transactions shall not be included in determin-ing net income but shall be reported in the same man-ner as translation adjustments (paragraph 13):

a. Foreign currency transactions that are designatedas, and are effective as, economic hedges of a netinvestment in a foreign entity, commencing as ofthe designation date

b. Intercompany foreign currency transactions thatare of a long-term-investment nature (that is,settlement is not planned or anticipated in theforeseeable future), when the entities to the trans-action are consolidated, combined, or accounted

for by the equity method in the reporting enter-prise’s financial statements.

Hedges of Firm Commitments

21. The accounting for a gain or loss on a foreigncurrency transaction that is intended to hedge anidentifiable foreign currency commitment (for ex-ample, an agreement to purchase or sell equipment)is addressed by paragraph 37 of Statement 133.

Income Tax Consequences of Rate Changes

22. Interperiod tax allocation is required in accord-ance with FASB Statement No. 109, Accounting forIncome Taxes, if taxable exchange gains or tax-deductible exchange losses resulting from an entity’sforeign currency transactions are included in net in-come in a different period for financial statement pur-poses from that for tax purposes.

23. Translation adjustments shall be accounted for inthe same way as temporary differences under the pro-visions of Statement 109 [and] APB Opinion 23.APB Opinion No. 23, Accounting for IncomeTaxes—Special Areas, provides that deferred taxesshall not be provided for unremitted earnings of asubsidiary in certain instances; in those instances,deferred taxes shall not be provided on translationadjustments.

24. Statement 109 requires income tax expense to beallocated among income before extraordinary items,extraordinary items, adjustments of prior periods (orof the opening balance of retained earnings), and di-rect entries to other equity accounts. Some transac-tion gains and losses and all translation adjustmentsare reported in other comprehensive income. Any in-come taxes related to those transaction gains andlosses and translation adjustments shall be allocatedto other comprehensive income.

Elimination of Intercompany Profits

25. The elimination of intercompany profits that areattributable to sales or other transfers between entitiesthat are consolidated, combined, or accounted for bythe equity method in the enterprise’s financial state-ments shall be based on the exchange rates at thedates of the sales or transfers. The use of reasonableapproximations or averages is permitted.

Exchange Rates

26. The exchange rate is the ratio between a unit ofone currency and the amount of another currency forwhich that unit can be exchanged at a particular time.


FAS52–6

If exchangeability between two currencies is tempo-rarily lacking at the transaction date or balance sheetdate, the first subsequent rate at which exchangescould be made shall be used for purposes of thisStatement. If the lack of exchangeability is other thantemporary, the propriety of consolidating, combin-ing, or accounting for the foreign operation by the eq-uity method in the financial statements of the enter-prise shall be carefully considered.

27. The exchange rates to be used for translation offoreign currency transactions and foreign currencystatements are as follows:

a. Foreign Currency Transactions—The applicablerate at which a particular transaction could besettled at the transaction date shall be used totranslate and record the transaction. At a subse-quent balance sheet date, the current rate is thatrate at which the related receivable or payablecould be settled at that date.

b. Foreign Currency Statements—In the absence ofunusual circumstances, the rate applicable toconversion of a currency for purposes of divi-dend remittances shall be used to translate for-eign currency statements.4

28. If a foreign entity whose balance sheet date dif-fers from that of the enterprise is consolidated orcombined with or accounted for by the equitymethod in the financial statements of the enterprise,the current rate is the rate in effect at the foreign enti-ty’s balance sheet date for purposes of applying therequirements of this Statement to that foreign entity.

Use of Averages or Other Methods ofApproximation

29. Literal application of the standards in this State-ment might require a degree of detail in record keep-ing and computations that could be burdensome aswell as unnecessary to produce reasonable approxi-mations of the results. Accordingly, it is acceptable touse averages or other methods of approximation. Forexample, the propriety of using average rates totranslate revenue and expense amounts is noted inparagraph 12. Likewise, the use of other time- andeffort-saving methods to approximate the results ofdetailed calculations is permitted.

Disclosure

30. The aggregate transaction gain or loss includedin determining net income for the period shall be dis-closed in the financial statements or notes thereto.Certain enterprises, primarily banks, are dealers inforeign exchange. Although certain gains or lossesfrom dealer transactions may fit the definition oftransaction gains or losses in this Statement, theymay be disclosed as dealer gains or losses rather thanas transaction gains or losses.

31. An analysis of the changes during the period inthe accumulated amount of translation adjustmentsreported in equity shall be provided in a separate fi-nancial statement, in notes to the financial statements,or as part of a statement of changes in equity. At aminimum, the analysis shall disclose:

a. Beginning and ending amount of cumulativetranslation adjustments

b. The aggregate adjustment for the period result-ing from translation adjustments (paragraph 13)and gains and losses from certain hedges and in-tercompany balances (paragraph 20) (Para-graph 45(c) of Statement 133 specifies additionaldisclosures for instruments designated as hedgesof the foreign currency exposure of a net invest-ment in a foreign operation.)

c. The amount of income taxes for the period allo-cated to translation adjustments (paragraph 24)

d. The amounts transferred from cumulative trans-lation adjustments and included in determiningnet income for the period as a result of the sale orcomplete or substantially complete liquidation ofan investment in a foreign entity (paragraph 14).

32. An enterprise’s financial statements shall not beadjusted for a rate change that occurs after the date ofthe enterprise’s financial statements or after the dateof the foreign currency statements of a foreign entityif they are consolidated, combined, or accounted forby the equity method in the financial statements ofthe enterprise. However, disclosure of the rate changeand its effects on unsettled balances pertaining toforeign currency transactions, if significant, may benecessary.

4 If unsettled intercompany transactions are subject to and translated using preference or penalty rates, translation of foreign currency statementsat the rate applicable to dividend remittances may cause a difference between intercompany receivables and payables. Until that difference iseliminated by settlement of the intercompany transaction, the difference shall be treated as a receivable or payable in the enterprise’s financialstatements.


FAS52–7

Effective Date and Transition

33. This Statement shall be effective for fiscal yearsbeginning on or after December 15, 1982, althoughearlier application is encouraged. The initial applica-tion of this Statement shall be as of the beginning ofan enterprise’s fiscal year. Financial statements forfiscal years before the effective date, and financialsummaries or other data derived therefrom, may berestated to conform to the provisions of para-graphs 5−29 of this Statement. In the year that thisStatement is first applied, the financial statementsshall disclose the nature of any restatement and its ef-fect on income before extraordinary items, net in-come, and related per-share amounts for each fiscalyear restated. If the prior year is not restated, disclo-sure of income before extraordinary items and netincome for the prior year computed on a pro formabasis is permitted.

34. The effect of translating all of a foreign entity’sassets and liabilities from a foreign functional cur-rency into the reporting currency at the current ex-change rate as of the beginning of the year for whichthis Statement is first applied shall be reported inother comprehensive income. The effect of remeasur-ing a foreign entity’s deferred income taxes and lifeinsurance policy acquisition costs at the current ex-change rate (paragraph 54) as of the beginning of theyear for which this Statement is first applied shall bereported as an adjustment of the opening balance ofretained earnings.

35. Amounts deferred on forward contracts that(a) under Statement 8 were accounted for as hedgesof identifiable foreign currency commitments to re-ceive proceeds from the use or sale of nonmonetaryassets translated at historical rates, and (b) are can-celed at the time this Statement is first applied, shallbe included in the opening balance of the cumulativetranslation adjustments component of equity up tothe amount of the offsetting adjustment attributableto those nonmonetary assets.

36. Financial statements for periods beginning on orafter the effective date of this Statement shall includethe disclosures specified by paragraphs 30−32. To theextent practicable, those disclosures shall also be in-cluded in financial statements for earlier periods thathave been restated pursuant to paragraph 33.

37. Financial statements of enterprises that firstadopt this standard for fiscal years ending on or be-fore March 31, 1982 shall disclose the effect ofadopting the new standard on income before extraor-dinary items, net income, and related per-shareamounts for the year of the change. Those disclo-sures are not required for financial statements of en-terprises that first adopt this standard for subsequentfiscal years.

38. The Board expects to issue an Exposure Draftproposing an amendment of FASB StatementNo. 33, Financial Reporting and Changing Prices, tobe consistent with the functional currency approachto foreign currency translation. Prior to issuance of afinal amendment of Statement 33, enterprises thatadopt this Statement and that are subject to the re-quirements of Statement 33 shall have either of thefollowing options:

a. They may prepare the supplementary informa-tion based on this Statement and on the proposedamendment of Statement 33.

b. They may prepare the supplementary informa-tion based on the application of Statement 8 andon the provisions of existing Statement 33. (Un-der this option, historical cost information basedon the application of Statement 8 shall be pre-sented in the supplementary information forcomparison with the constant dollar and currentcost information.)

Enterprises that would become subject to the re-quirements of Statement 33 as a result of adoptingthis Statement are exempt from the requirementsof Statement 33 until the effective date of thisStatement.

The provisions of this Statement neednot be applied to immaterial items.

This Statement was adopted by the affırmativevotes of four members of the Financial AccountingStandards Board. Messrs. Block, Kirk, and Morgandissented.

Messrs. Block, Kirk, and Morgan dissent to the is-suance of this Statement. They start from a premisedifferent from that underlying this Statement. Theybelieve that more meaningful consolidated results are


FAS52–8

attained by measuring costs, cost recovery, and ex-change risk from a dollar perspective rather thanfrom multiple functional currency perspectives. Ac-cordingly, the dissenters do not believe that thisStatement improves financial reporting. In their opin-ion, improved financial reporting would have re-sulted from an approach that:

a. Adopted objectives of translation that retainedthe concept of a single consolidated entity and asingle unit of measure (that is, all elements ofU.S. consolidated financial statements would bemeasured in dollars rather than multiple func-tional currencies)

b. Avoided creating direct entries to equityc. Essentially retained Statement 8’s translation

method, with an exception being translation oflocally sourced inventory at the current rate

d. Recognized all gains and losses in net income(that is, no separate and different accounting fortransaction gains or losses and translation adjust-ments), but allowed for a separate and distinctpresentation of those gains and losses within theincome statement

e. Recognized additional contractual arrangements(for example, operating leases and take-or-paycontracts) that effectively hedged an exposed netmonetary liability position.

The dissenters recognize that such an approachwould not satisfy all of the critics of Statement 8, butthey believe it would have avoided the more far-reaching implications of the functional currencytheory. They acknowledge that translating certain in-ventories at current rates departs from historical costin dollars. However, they would accept that departureon pragmatic grounds as part of a solution to an ex-ceedingly difficult problem.

As further discussed in subsequent paragraphs,the dissenting Board members do not support thisStatement because in their opinion it:

a. Builds on two incompatible premises and, as a re-sult, produces anomalies and a significant but un-warranted reporting distinction between transac-tion gains and losses and translation adjustments

b. Adopts objectives and methods that are at vari-ance with fundamental concepts that underliepresent financial reporting

c. Incorrectly assumes that an aggregation of the re-sults of foreign operations measured in functionalcurrencies and expressed in dollars, rather thanconsolidated results measured in dollars, assists

U.S. investors and creditors in assessing futurecash flows to them

d. Will not result in similar accounting for similarcircumstances.

Incompatibility of Underlying Premises

The standards for translating foreign currency fi-nancial statements set forth in this Statement stemfrom two premises that are incompatible with eachother. The first premise is that it is a parent compa-ny’s net investment in a foreign operation that is sub-ject to exchange rate risk rather than the foreign op-eration’s individual assets and liabilities. The secondpremise is that translation should retain the relation-ships in foreign currency financial statements asmeasured by the functional currency. The premise ofa parent company’s exposed net investment reflects adollar perspective of exchange rate risk, and that callsfor a dollar measure of the effects of exchange ratechanges. The premise of retaining the relationships ofmeasurements in functional currency financial state-ments calls for a functional currency measure of theeffects of exchange rate changes.

The dissenting Board members note that althoughthe translation process can retain certain intraperiodrelationships reported in functional currency finan-cial statements, it cannot retain interperiod functionalcurrency relationships when exchange rates change.Further, when an exchange rate changes between thedollar and a foreign currency, the value of any hold-ings of that currency changes and, from a dollar per-spective, the resulting gain or loss is either real, or un-real, in its entirety. However, to implement thefunctional currency perspective, the standards resultin a division of that gain or loss into two components.One is considered in measuring consolidated net in-come and the other is considered a translation adjust-ment. Thus, the standards require a transaction gainin income on a foreign operation’s holdings of a thirdcurrency when that currency strengthens in relationto the functional currency, even if the third currencyhas weakened in terms of dollars. That gain will bereported in consolidated net income despite the factthat it does not exist in dollar terms and can neverprovide increased dollar cash flows to U.S. investorsand creditors. The standards inherently recognize thatfact by requiring a compensating debit translation ad-justment. (Examples that further illustrate these con-cerns are contained in paragraphs 111−113 of theAu-gust 28, 1980 Exposure Draft, Foreign CurrencyTranslation.)


FAS52–9

The dissenters believe that the need for a transla-tion adjustment that adjusts consolidated equity to thesame amount as would have resulted had all foreigncurrency transactions of foreign operations beenmeasured in dollars demonstrates the incompatibilityof the two underlying premises. They believe that in-compatibility is further demonstrated by the differingviews of the nature of translation adjustments de-scribed in paragraphs 113 and 114. In the dissenters’opinion, translation adjustments are, from a dollarperspective, gains and losses as defined in FASBConcepts Statement No. 3, Elements of FinancialStatements of Business Enterprises, which should bereported in net income when exchange rates change.The dissenters believe that from a functional cur-rency perspective, translation adjustments fail tomeet any definition of an element of financial state-ments because they do not exist in terms of func-tional currency cash flows.

Relationship to Preexisting FundamentalConcepts

The dissenters believe the two premises underly-ing this Statement (discussed above) challenge andreject the dollar perspective that underlies existingtheories of historical cost and capital maintenance,inflation accounting, consolidation, and realization.The rejection of the dollar perspective has ramifica-tions far beyond this project and was unnecessary ina translation project.

While not explicitly stated, today’s accountingmodel includes the capital maintenance concept thatincome of a consolidated U.S. entity exists only afterrecovery of historical cost measured in dollars. Forexample, prior to this Statement, the gain on the saleby a foreign operation of an internationally priced in-ventory item or a marketable security would havebeen measured by comparing the dollar equivalentsales price with the fixed dollar equivalent historicalcost of the item. This Statement changes that. It re-measures the dollar equivalent cost while the item isheld (measured by changes in the exchange rate be-tween the foreign currency and the dollar) and treatsthat remeasurement as a translation adjustment, sel-dom if ever to be reported in net income. Under thisStatement, consolidated net income, although ex-pressed in dollars, does not represent the measure ofincome after maintaining capital measured in dollars.The dissenters believe that U.S. investors’ and credi-tors’ decisions are based on a dollar perspective ofcapital maintenance. Not only does this Statementchange income measurement and capital mainte-

nance concepts in the primary financial statementsbut it also implies the need to modify the measure-ment of changes in current costs (sometimes referredto as holding gains or losses) in Statement 33 and,likewise, to change that Statement’s requirements forconstant dollar accounting to constant functional cur-rency accounting.

This Statement abandons the long-standing prin-ciple that consolidated results should be measuredfrom a single perspective rather than multiple per-spectives. The dissenters believe (for the reasons setforth in paragraphs 83−95 of Statement 8) that asingle perspective is essential for (a) valid additionand subtraction in the measurement of financial posi-tion and periodic net income and (b) the understand-ability and representational faithfulness of consoli-dated results presented in dollars and described asbeing prepared on the historical cost basis. The dis-senters believe that readers of financial statements arebetter served by having consolidated financial state-ments prepared in terms of a common benchmark—a single unit of measure. This means to the dissentersthat the translation process is one of remeasurementof the individual items of foreign financial statements(not net investments) into dollars—much in the sameway as Statement 33 presently requires a remeasure-ment of individual items of financial statements (notnet investments) from nominal dollar measures intoconstant dollars.

The Statement introduces a concept of realization(paragraphs 71, 111, 117, and 119) different from anypreviously applied in consolidated financial state-ments. It requires the results of foreign operations tobe measured in various functional currencies andthen translated into dollars and included in consoli-dated net income. It defers recognizing in net incomethe effects of exchange rate changes from a dollarperspective on the individual assets and liabilities ofthose same foreign operations until an indefinite fu-ture period that will almost always be beyond thepoint in time that those individual assets and liabili-ties have ceased to exist. As a result, the dollar effectsof a rate change on current operating revenues arerecognized when they occur by reporting in the trans-lated income statement an increased or decreaseddollar equivalent for those revenues versus the dollarequivalent of identical revenues generated before therate change. However, the effects of the same ratechange on the uncollected receivables from thoseprevious revenue transactions are not included in netincome until liquidation of the foreign operation. Bynot recognizing in net income the effects of exchangerate changes on existing receivables, this Statement


FAS52–10

results in sales denominated in a foreign currency be-ing accounted for as if they had been denominated indollars. That result is a focal point of the criticismmade in this Statement (paragraph 75) about State-ment 8. However, unlike this Statement, Statement 8recognized that foreign currency sales are not de-nominated in dollars and therefore it required that theeffects of exchange rate changes on all foreign cur-rency denominated receivables be recognized in netincome. To do otherwise places the enterprise in theanomalous position of having recognized the entireeffect of the rate change on a current transactionwhile holding in suspense its effect on a previoustransaction until liquidation of the foreign operation.

This Statement accepts the use of the Statement 8methodology (that is, using the dollar as the func-tional currency) for some foreign operations (includ-ing all operations in highly inflationary economies),but at the same time criticizes that methodology. Itasserts that the Statement 8 methodology results inaccounting as if all transactions were conducted inthe economic environment of the United States andin dollars (paragraphs 74, 75, and 86). The dissentersbelieve such views were convincingly rebutted inparagraphs 94 and 95 of Statement 8, as follows:

Some respondents to the Exposure Draftcriticized that objective as an attempt to ac-count for local and foreign currency transac-tions of foreign operations as if they weredollar transactions or, to a few respondents, asif they were dollar transactions in the UnitedStates. In the Board’s judgment, those criti-cisms are not valid. Neither the objective northe procedures to accomplish it change thedenomination of a transaction or the environ-ment in which it occurs. The proceduresadopted by the Board are consistent with thepurpose of consolidated financial statements.The foreign currency transactions of an enter-prise and the local and foreign currency trans-actions of its foreign operations are translatedand accounted for as transactions of a singleenterprise. The denomination of transactionsand the location of assets are not changed;however, the separate corporate identitieswithin the consolidated group are ignored.Translation procedures are merely a means ofremeasuring in dollars amounts that are de-nominated or originally measured in foreigncurrency. That is, the procedures do not at-tempt to simulate what the cost of a foreignplant would have been had it been located inthe United States; instead, they recognize the

factors that determined the plant’s cost in theforeign location and express that cost indollars.

If translation procedures were capable ofchanging the denomination of an asset or li-ability from foreign currency to dollars, noexchange risk would be present.

Effects on Cash Flow Assessments

The dissenters believe that U.S. investors andcreditors should be provided with information abouta multinational enterprise’s performance measured indollars because that is the currency in which, ulti-mately, the enterprise makes cash payments to them.Foreign exchange exposure to a U.S. investor orcreditor is the exposure to increased or decreased po-tential dollar cash flows caused by changes in ex-change rates between foreign currencies and the dol-lar. Changes in exchange rates between two foreigncurrencies are not relevant, except to the extent thateach such foreign currency’s exchange rate for thedollar changes.

Supporting the functional currency perspective isthe assenters’ view (paragraphs 73, 75, 97, and else-where) that a translated functional currency incomestatement better provides U.S. investors and creditorswith information necessary in assessing future cashflows than does an income statement whose compo-nents have been measured from a dollar perspective.The dissenting view is that a translated functionalcurrency income statement is inappropriate becauseit can include items that (a) do not exist for the con-solidated enterprise (for example, transaction gainson intercompany trade receivables or monetary itemsdenominated in dollars) or (b) are incorrectly meas-ured (for example, a gain on a holding of a third cur-rency that significantly strengthens against the dollarbut only moderately strengthens against the func-tional currency). It can also exclude items that do ex-ist for the consolidated enterprise (for example, again on a monetary asset denominated in a foreignoperation’s functional currency when that currencystrengthens against the dollar).

The dissenters see no persuasive reasoning to sup-port the belief that external users want or need toknow the amount of transaction gains or losses asmeasured from the perspective of the manager of theforeign operation (that is, in functional currency),while at the same time wanting a balance sheet that ismeasured from a dollar perspective—a balance sheetthat denies the usefulness of the foreign perspective.(The previously referenced examples in the August


FAS52–11

1980 Exposure Draft also further illustrate thisconcern.)

Similar Accounting for Similar Circumstances

The dissenters believe that the criteria in para-graph 42 for deciding between the Statement 8 trans-lation method and the current rate method areinappropriate (for the reasons set forth in para-graphs 140−151 of Statement 8). They also believethat application of those criteria will not result insimilar accounting for similar situations.

Likewise, the absence of effective criteria thatwould objectively indicate when foreign currencytransactions (paragraph 20(a)) and forward exchangecontracts (paragraph 21) are hedges creates the possi-bility that transaction gains or losses that should bereported in net income currently may instead be re-ported as translation adjustments or deferred ashedges of commitments.

The variety of permissible methods of transitionfrom the existing Statement 8 requirements may also

result in similar circumstances being accounted fordifferently. Mr. Morgan believes the transition para-graphs should have required that the amount neces-sary to adjust from the Statement 8 basis to the newbasis be reported as the opening translation adjust-ment in equity for the first year in which the newStatement becomes effective. To restate any yearprior to the effective date of this Statement may fosteran inappropriate conclusion, namely, that those re-stated results are the results an entity might have ex-perienced had the new Statement been in effect forearlier periods. There is considerable evidence thatmany enterprises alter their hedging of foreign ex-change exposure depending on the accounting stand-ards currently in effect. Thus, restated financial state-ments for those entities, whether required or donevoluntarily, could not accurately reflect what mighthave happened had this Statement been in effect. Vol-untary restatement also diminishes the comparabilityof financial reporting among companies. In Mr. Mor-gan’s view, the Board should have prohibited restate-ment as a method of transition to this new Statement.

Members of the Financial Accounting Standards Board:

Donald J. Kirk,Chairman

Frank E. Block

John W. MarchRobert A. MorganDavid Mosso

Robert T. SprouseRalph E. Walters

Appendix A

DETERMINATION OF THE FUNCTIONALCURRENCY

39. An entity’s functional currency is the currency ofthe primary economic environment in which the en-tity operates; normally, that is the currency of the en-vironment in which an entity primarily generates andexpends cash. The functional currency of an entity is,in principle, a matter of fact. In some cases, the factswill clearly identify the functional currency; in othercases they will not.

40. It is neither possible nor desirable to provide un-equivocal criteria to identify the functional currencyof foreign entities under all possible facts and cir-cumstances and still fulfill the objectives of foreigncurrency translation. Arbitrary rules that might dic-tate the identification of the functional currency ineach case would accomplish a degree of superficialuniformity but, in the process, might diminish the rel-evance and reliability of the resulting information.

41. The Board has developed, with significant inputfrom its task force and other advisors, the followinggeneral guidance on indicators of facts to be consid-ered in identifying the functional currency. In thoseinstances in which the indicators are mixed and thefunctional currency is not obvious, management’sjudgment will be required in order to determine thefunctional currency that most faithfully portrays theeconomic results of the entity’s operations andthereby best achieves the objectives of foreign cur-rency translation set forth in paragraph 4. Manage-ment is in the best position to obtain the pertinentfacts and weigh their relative importance in deter-mining the functional currency for each operation. Itis important to recognize that management’s judg-ment is essential and paramount in this determina-tion, provided only that it is not contradicted by thefacts.

42. The salient economic factors set forth below, andpossibly others, should be considered both individu-ally and collectively when determining the functionalcurrency.


FAS52–12

a. Cash flow indicators(1) Foreign Currency—Cash flows related to the

foreign entity’s individual assets and liabili-ties are primarily in the foreign currency anddo not directly impact the parent company’scash flows.

(2) Parent’s Currency—Cash flows related to theforeign entity’s individual assets and liabili-ties directly impact the parent’s cash flows ona current basis and are readily available forremittance to the parent company.

b. Sales price indicators(1) Foreign Currency—Sales prices for the for-

eign entity’s products are not primarily re-sponsive on a short-term basis to changes inexchange rates but are determined moreby local competition or local governmentregulation.

(2) Parent’s Currency—Sales prices for the for-eign entity’s products are primarily respon-sive on a short-term basis to changes in ex-change rates; for example, sales prices aredetermined more by worldwide competitionor by international prices.

c. Sales market indicators(1) Foreign Currency—There is an active local

sales market for the foreign entity’s products,although there also might be significantamounts of exports.

(2) Parent’s Currency—The sales market ismostly in the parent’s country or salescontracts are denominated in the parent’scurrency.

d. Expense indicators(1) Foreign Currency—Labor, materials, and

other costs for the foreign entity’s products orservices are primarily local costs, eventhough there also might be imports fromother countries.

(2) Parent’s Currency—Labor, materials, andother costs for the foreign entity’s products orservices, on a continuing basis, are primarilycosts for components obtained from thecountry in which the parent company islocated.

e. Financing indicators(1) Foreign Currency—Financing is primarily

denominated in foreign currency, and fundsgenerated by the foreign entity’s operationsare sufficient to service existing and normallyexpected debt obligations.

(2) Parent’s Currency—Financing is primarilyfrom the parent or other dollar-denominated

obligations, or funds generated by the foreignentity’s operations are not sufficient to serviceexisting and normally expected debt obliga-tions without the infusion of additional fundsfrom the parent company. Infusion of addi-tional funds from the parent company for ex-pansion is not a factor, provided funds gener-ated by the foreign entity’s expandedoperations are expected to be sufficient toservice that additional financing.

f. Intercompany transactions and arrangementsindicators(1) Foreign Currency—There is a low volume of

intercompany transactions and there is not anextensive interrelationship between the op-erations of the foreign entity and the parentcompany. However, the foreign entity’s op-erations may rely on the parent’s or affiliates’competitive advantages, such as patents andtrademarks.

(2) Parent’s Currency—There is a high volumeof intercompany transactions and there is anextensive interrelationship between the op-erations of the foreign entity and the parentcompany. Additionally, the parent’s currencygenerally would be the functional currency ifthe foreign entity is a device or shell corpora-tion for holding investments, obligations, in-tangible assets, etc., that could readily be car-ried on the parent’s or an affiliate’s books.

43. In some instances, a foreign entity might havemore than one distinct and separable operation. Forexample, a foreign entity might have one operationthat sells parent-company-produced products and an-other operation that manufactures and sells foreign-entity-produced products. If those two operations areconducted in different economic environments, thosetwo operations might have different functional cur-rencies. Similarly, a single subsidiary of a financialinstitution might have relatively self-contained andintegrated operations in each of several differentcountries. In circumstances such as those describedabove, each operation may be considered to be an en-tity as that term is used in this Statement; and, basedon the facts and circumstances, each operation mighthave a different functional currency.

44. Foreign investments that are consolidated or ac-counted for by the equity method are controlled by orsubject to significant influence by the parent com-pany. Likewise, the parent’s currency is often usedfor measurements, assessments, evaluations, projec-tions, etc., pertaining to foreign investments as part of


FAS52–13

the management decision-making process. Suchmanagement control, decisions, and resultant actionsmay reflect, indicate, or create economic facts andcircumstances. However, the exercise of significantmanagement control and the use of the parent’s cur-rency for decision-making purposes do not deter-mine, per se, that the parent’s currency is the func-tional currency for foreign operations.

45. Once a determination of the functional currencyis made, that decision shall be consistently used foreach foreign entity unless significant changes in eco-nomic facts and circumstances indicate clearly thatthe functional currency has changed. (FASB State-ment No. 154, Accounting Changes and Error Cor-rections, paragraph 5, states that “adoption or modifi-cation of an accounting principle necessitated bytransactions or events that are clearly different in sub-stance from those previously occurring” is not achange in accounting principle.)

46. If the functional currency changes from a foreigncurrency to the reporting currency, translation adjust-ments for prior periods should not be removed fromequity and the translated amounts for nonmonetaryassets at the end of the prior period become the ac-counting basis for those assets in the period of thechange and subsequent periods. If the functional cur-rency changes from the reporting currency to a for-eign currency, the adjustment attributable to current-rate translation of nonmonetary assets as of the dateof the change should be reported in other comprehen-sive income.

Appendix B

REMEASUREMENT OF THE BOOKS OFRECORD INTO THE FUNCTIONALCURRENCY*

Introduction

47. Paragraph 12 of this Statement requires that allof a foreign entity’s assets and liabilities shall be

translated from the entity’s functional currency intothe reporting currency using the current exchangerate. Paragraph 12 also requires that revenues, ex-penses, gains, and losses be translated using the rateson the dates on which those elements are recognizedduring the period. The specified result can be reason-ably approximated by using an appropriatelyweighted average exchange rate for the period. If anentity’s books of record are not maintained in itsfunctional currency, this Statement (paragraph 10) re-quires remeasurement into the functional currencyprior to the translation process. If a foreign entity’sfunctional currency is the reporting currency, remea-surement into the reporting currency obviates transla-tion. The remeasurement process should produce thesame result as if the entity’s books of record had beeninitially recorded in the functional currency. To ac-complish that result, it is necessary to use historicalexchange rates between the functional currency andanother currency in the remeasurement process forcertain accounts (the current rate will be used for allothers), and this appendix identifies those accounts.To accomplish that result, it is also necessary to rec-ognize currently in income all exchange gains andlosses from remeasurement of monetary assets andliabilities that are not denominated in the functionalcurrency (for example, assets and liabilities that arenot denominated in dollars if the dollar is the func-tional currency).

48. The table below lists common nonmonetary bal-ance sheet items and related revenue, expense, gain,and loss accounts that should be remeasured usinghistorical rates in order to produce the same result interms of the functional currency that would have oc-curred if those items had been initially recorded inthe functional currency.

*The guidance in this appendix applies only to those instances in which the books of record are not maintained in the functional currency.


FAS52–14

Accounts to Be Remeasured UsingHistorical Exchange Rates

Marketable securities carried at cost- Equity securities- Debt securities not intended to be held until maturity

Inventories carried at cost

Prepaid expenses such as insurance, advertising, and rent

Property, plant, and equipment

Accumulated depreciation on property, plant, and equipment

Patents, trademarks, licenses, and formulas

Goodwill

Other intangible assets

Deferred charges and credits, except policy acquisition costs for life insurance companies

Deferred income

Common stock

Preferred stock carried at issuance price

Examples of revenues and expenses related to nonmonetary items:Cost of goods soldDepreciation of property, plant, and equipmentAmortization of intangible items such as patents, licenses, etc.Amortization of deferred charges or credits except policy acquisition costs for life insurance companies

Inventories—Applying the Rule of Cost orMarket, Whichever Is Lower, to RemeasureInventory Not Recorded in the FunctionalCurrency

49. The rule of cost or market, whichever is lower(as described in Statement 6 of Chapter 4, “InventoryPricing,” of ARB 43), requires special applicationwhen the books of record are not kept in the func-tional currency. Inventories carried at cost in thebooks of record in another currency should be firstremeasured to cost in the functional currency usinghistorical exchange rates. Then, historical cost in thefunctional currency is compared with market as

stated in the functional currency. Application of therule in functional currency may require write-downsto market in the functional currency statements eventhough no write-down has been made in the books ofrecord maintained in another currency. Likewise, awrite-down in the books of record may need to be re-versed if market exceeds historical cost as stated inthe functional currency. If inventory5 has been writ-ten down to market in the functional currency state-ments, that functional currency amount shall con-tinue to be the carrying amount in the functionalcurrency financial statements until the inventory issold or a further write-down is necessary.

5An asset other than inventory may sometimes be written down from historical cost. Although that write-down is not under the rule of cost ormarket, whichever is lower, the approach described in this paragraph might be appropriate. That is, a write-down may be required in the func-tional currency statements even though not required in the books of record, and a write-down in the books of record may need to be reversedbefore remeasurement to prevent the remeasured amount from exceeding functional currency historical cost.


FAS52–15

50. Literal application of the rule of cost or market,whichever is lower, may require an inventory write-down6 in functional currency financial statements forlocally acquired inventory7 if the value of the cur-rency in which the books of record are maintainedhas declined in relation to the functional currency be-tween the date the inventory was acquired and thedate of the balance sheet. Such a write-down may notbe necessary, however, if the replacement costs orselling prices expressed in the currency in which thebooks of record are maintained have increased suffi-ciently so that market exceeds historical cost asmeasured in functional currency. Paragraphs 51−53illustrate this situation.

51. Assume the following:

a. When the rate is BR*1 = FC2.40, a foreign sub-sidiary of a U.S. company purchases a unit of in-ventory at a cost of BR500 (measured in func-tional currency, FC1,200).

b. At the foreign subsidiary’s balance sheet date, thecurrent rate is BR1 = FC2.00 and the current re-placement cost of the unit of inventory is BR560(measured in functional currency, FC1,120).

c. Net realizable value is BR630 (measured in func-tional currency, FC1,260).

d. Net realizable value reduced by an allowance foran approximately normal profit margin is BR550(measured in functional currency, FC1,100).

Because current replacement cost as measured in thefunctional currency (FC1,120) is less than historicalcost as measured in the functional currency(FC1,200), an inventory write-down of FC80 isrequired in the functional currency financialstatements.

52. Continue to assume the same information in thepreceding example but substitute a current replace-ment cost at the foreign subsidiary’s balance sheet

date of BR620. Because market as measured in thefunctional currency (BR620 × FC2.00 = FC1,240)exceeds historical cost as measured in the functionalcurrency (BR500 × FC2.40 = FC1,200), an inven-tory write-down is not required in the financialstatements.

53. As another example, assume the information inparagraph 51, except that selling prices in terms ofthe currency in which the books of record are main-tained have increased so that net realizable value isBR720 and net realizable value reduced by an allow-ance for an approximately normal profit margin isBR640. In that case, because replacement cost meas-ured in functional currency (BR560 × FC2.00 =FC1,120) is less than net realizable value reduced byan allowance for an approximately normal profitmargin measured in functional currency (BR640 ×FC2.00 = FC1,280), market is FC1,280. Becausemarket as measured in the functional currency(FC1,280) exceeds historical cost as measured in thefunctional currency (BR500 × FC2.40 = FC1,200),an inventory write-down is not required in the func-tional currency financial statements.

Deferred Taxes and Policy Acquisition Costs

54. Statement 8 required certain deferred taxes thatdo not relate to assets or liabilities translated at cur-rent rates to be translated at historical rates.8 Interpre-tation 15 required unamortized policy acquisitioncosts of a stock life insurance company to be trans-lated at historical rates.9 In Statement 33, the Boarddecided that, because of the close relationship ofthose accounts to related monetary items, a monetaryclassification should be used for the purposes of con-stant dollar accounting. For similar reasons, theBoard decided to retain the classification requiredby Statement 33 for the purposes of remeasurementof an entity’s books of record into its functionalcurrency.

6This paragraph is not intended to preclude recognition of gains in a later interim period to the extent of inventory losses recognized from marketdeclines in earlier interim periods if losses on the same inventory are recovered in the same year, as provided by paragraph 14(c) ofAPB OpinionNo. 28, Interim Financial Reporting, which states: “Inventory losses from market declines should not be deferred beyond the interim period inwhich the decline occurs. Recoveries of such losses on the same inventory in later interim periods of the same fiscal year through market pricerecoveries should be recognized as gains in the later interim period. Such gains should not exceed previously recognized losses. Some marketdeclines at interim dates, however, can reasonably be expected to be restored in the fiscal year. Such temporary market declines need not berecognized at the interim date since no loss is expected to be incurred in the fiscal year.”7An inventory write-down also may be required for imported inventory.

*BR = Currency in which the books of record are maintainedFC = Functional currency

8Statement 8, paragraphs 50−52.9Interpretation 15, paragraph 4.


FAS52–16

Appendix C

BASIS FOR CONCLUSIONS

CONTENTS

ParagraphNumbers

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Nature of the Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56− 69Objectives of Translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70− 76The Functional Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77− 84Consolidation of Foreign Currency Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85− 93Translation of Foreign Currency Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94−101Translation of Operations in Highly Inflationary Economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102−109Translation Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110−119Transaction Gains and Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120−127Foreign Currency Transactions That Hedge a Net Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128−130Transaction Gains and Losses Attributable to Intercompany Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 131Foreign Currency Transactions That Hedge Foreign Currency Commitments . . . . . . . . . . . . . . . . . . . . . . . 132−133Income Tax Consequences of Rate Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134−135Elimination of Intercompany Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136−137Exchange Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138−139Use of Averages or Other Methods of Approximation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141−144Effective Date and Transition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145−149

Appendix C

BASIS FOR CONCLUSIONS

Introduction

55. This appendix reviews considerations that weredeemed significant by members of the Board inreaching the conclusions in this Statement. TheBoard members who assented to this Statement didso on the basis of the overall considerations; indi-vidual members gave greater weight to some factorsthan to others.

Nature of the Problem

56. Operations and transactions of an enterpriseare affected by the changing prices of goods andservices it buys and sells relative to a unit of currency,which is usually also the measuring unit for financialreporting.

57. If the enterprise operates in more than one cur-rency environment, it is affected by the changingprices of goods and services in more than one eco-nomic environment and, additionally, by changes inrelative prices among the several units of currency inwhich it conducts its business.

58. The accounting model, generally referred to asthe historical cost model, does not generally recog-nize the effect of changing prices of goods and serv-ices until there has been an exchange transaction,usually a sale or purchase. In general, then, it doesnot recognize unrealized holding gains resulting fromchanges in the price of goods and services relative tothe unit of currency.

59. For enterprises conducting activities in morethan a single currency, the practical necessities of fi-nancial reporting in a single currency require that thechanging prices between two units of currency be ac-commodated in some fashion. People generally agreeon this practical necessity but disagree on conceptsand details of implementation. As a result, there is


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significant disagreement among informed observersregarding the basic nature, information content, andmeaning of results produced by various methods oftranslating amounts from foreign currencies into thereporting currency. Each method has strong propo-nents and severe critics.

60. In dealing with this dilemma, the Board wasfaced with the following basic choices:

a. Changing the accounting model to one that rec-ognizes currently the effects of all changingprices in the primary financial statements

b. Deferring any recognition of changing curren-cy prices until they are realized by an actualexchange of foreign currency into the reportingcurrency

c. Recognizing currently the effect of changing cur-rency prices on the carrying amounts of desig-nated foreign assets and liabilities

d. Recognizing currently the effect of changing cur-rency prices on the carrying amounts of all for-eign assets and liabilities.

61. Alternative (a) runs counter to the Board’s ap-proach in Statement 33, which fosters experimenta-tion with supplemental reporting to test the feasibil-ity, usefulness, and cost of various techniques forreporting the effects of changing prices. Accordingly,the Board did not consider a change in the primary fi-nancial statement model to be a reasonable alterna-tive for this project on foreign currency translation.

62. Alternative (b) has little or no support from theBoard or its constituents. All transactions and bal-ances would be translated at historical exchangerates—a formidable clerical task—until conversionto the parent’s currency occurred. Postponing recog-nition would fail to reflect the effects of possibly verysignificant economic events at the time they oc-curred, particularly those that affect transactions thatmust be settled under changed currency prices. Mostwould consider this a retreat rather than an advancetoward more useful financial reporting.

63. Alternative (c) is the approach taken in State-ment 8. Although some believe this approach is con-ceptually consistent with the historical cost model,others do not agree. In any event, this approach hasproduced results that the Board and many constitu-ents believe do not reflect the underlying economicreality of many foreign operations and thereby pro-duces results that are not relevant. A summary of themore common criticisms of Statement 8 is includedin paragraphs 153−156 of Appendix D.

64. Some constituents urged the Board to introducea selective departure from the rationale of State-ment 8 by simply adding selected assets to or delet-ing selected liabilities from the list of those for whichthe effect of changing currency prices is currentlyrecognized under Statement 8. The most frequentproposals would translate all or some portion of in-ventory at current exchange rates. This approachwould reduce the reported exchange gains and lossesof many enterprises, but it would increase the re-ported exchange gains and losses of other enterprises.It would do nothing to lessen the impact of temporalmethod gains and losses on enterprises that have nosignificant amounts of inventory, such as financial in-stitutions; nor would it resolve problems caused bylarge amounts of debt-financed property, plant, andequipment. Thus, it is not a general cure for the citeddeficiencies and it has little or no conceptual basis.

65. Those who advocate a limited modification totranslate inventories at the current rate generally op-pose translating property, plant, and equipment andother nonmonetary assets on the same basis. As a re-sult, depreciation allocated to inventory and cost ofsales would be translated at the current rate, while de-preciation allocated directly to expense would betranslated at historical rates. This is inconsistent inconcept and result. In the absence of any conceptualdistinction among nonmonetary items, the list ofmodifications would be subject to requests for con-tinuous revisions that could be assessed only on anarbitrary, ad hoc basis. Selective modifications ofStatement 8 were rejected by the Board primarily onthose grounds.

66. The Board decided that, of the practical alterna-tives available to it, alternative (d) has the most con-ceptual merit, particularly for foreign operations thatare reasonably self-contained. It will result in reportsof financial condition and results of operations that,within the constraints of the historical cost model,will most closely reflect economic effects.

67. The problem is complicated by the fact that for-eign operations differ greatly in structure and sub-stance. In some situations, only certain assets and li-abilities are exposed to foreign exchange risk,whereas in others the entire foreign operation or netinvestment is exposed to foreign exchange risk.These differences can significantly change the eco-nomic effect of exchange rate fluctuations.

68. The Board agreed that these variations in eco-nomic facts and circumstances should be recognizedto the degree it is practical to do so and, accordingly,


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settled on the functional currency approach to trans-lation as one that accommodates alternative (d)above, but recognizes situational differences. The na-ture of these differences and guidance for identifyingthe functional currency appears in paragraphs 41 and42 of Appendix A.

69. A feature of the functional currency approach isthe current rate translation method. The Board recog-nizes that the current rate method, although commonin some other countries, has not been extensivelyused in the United States. Based on extensive studyand due process, however, the Board believes that thefunctional currency approach best recognizes thesubstantive differences among foreign operationsand best reflects the underlying economic effects ofexchange rate changes in the consolidated financialstatements. The functional currency approachencompasses:

a. Identifying the functional currency of the entity’seconomic environment

b. Measuring all elements of the financial state-ments in the functional currency

c. Using the current exchange rate for translationfrom the functional currency to the reporting cur-rency, if they are different

d. Distinguishing the economic impact of changesin exchange rates on a net investment from theimpact of such changes on individual assets andliabilities that are receivable or payable in curren-cies other than the functional currency.

Objectives of Translation

70. The functional currency approach was adoptedafter considering the following objectives of foreigncurrency translation:

a. To provide information that is generally compat-ible with the expected economic effects of a ratechange on an enterprise’s cash flows and equity

b. To present the consolidated financial statementsof an enterprise in conformity with U.S. gener-ally accepted accounting principles

c. To reflect in consolidated financial statements thefinancial results and relationships of the indi-vidual consolidated entities as measured in theirfunctional currencies

d. To use a “single unit of measure” for financialstatements that include translated foreignamounts.

71. Objective (a), to provide information that is gen-erally compatible with the expected economic effectsof a rate change, was adopted by the Board as the ba-sic objective. This was responsive to the pervasivecriticism that translation results under Statement 8 donot reflect the underlying reality of foreign opera-tions. The Board focused on two aspects of account-ing results and their compatibility with the economiceffects of a rate change—changes in equity and cashflow consequences. Compatibility in terms of effecton equity is achieved, for example, if an exchangerate change that is favorable to an enterprise’s ex-posed position produces an accounting result that in-creases equity. Compatibility in terms of cash flowconsequences is achieved if rate changes that are rea-sonably expected to impact either functional or re-porting currency cash flows are reflected as gains orlosses in determining net income for the period, andthe effect of rate changes that have only remote anduncertain implications for realization are excludedfrom determining net income for the period.

72. The Board believes that objective (b), confor-mity with U.S. generally accepted accounting prin-ciples, is implicit in and basic to the purpose of all theBoard’s activities on every technical project and neednot be singled out as a separate objective for foreigncurrency translation.

73. The primary focus of financial reporting is infor-mation about an enterprise’s performance providedby measures of income and its components. Thosewho are concerned with the prospects for net cashflows are especially interested in that information.10

The prospects for net cash flows of a foreign entityare necessarily derived from its performance in termsof transactions and events that occur in its functionalcurrency; in turn, prospects for net cash flows to theconsolidated enterprise from the foreign entity arenecessarily derived from reinvestment of those func-tional currency net cash flows or their conversion anddistribution. Accordingly, the Board believes that theperformance of a foreign entity is best measured byU.S. generally accepted accounting principles ap-plied in terms of the functional currency in which theentity primarily conducts its business, generates andexpends cash, and reinvests or converts and distrib-utes cash to its parent.

74. The purpose of translating the functional cur-rency to the reporting currency, if the two are differ-ent, is to restate the functional currency financial

10FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises, paragraph 43.


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statements in terms of the reporting currency for in-clusion in consolidated financial statements. Theprocess should retain the financial results and rela-tionships that were created in the economic environ-ment of the foreign operations; it should not remea-sure individual financial statement elements as if theoperations had been conducted in the economic envi-ronment of the reporting currency. Only by retainingthe functional currency relationships of each operat-ing entity is it possible to portray aggregate perform-ance in different operating environments for pur-poses of consolidation. Accordingly, in addition toadopting objective (a), the Board also adopted objec-tives (b) and (c) in combination.

75. Objective (d), to use a “single unit of measure”(for example, the dollar) for financial statements thatinclude translated amounts, is the stated premise ofthe temporal method set forth in Statement 8. In theBoard’s view, that premise reflects in consolidated fi-nancial statements the transactions of the entiregroup, including foreign operations, as though all op-erations were extensions of the parent’s domestic ac-tivities and all transactions were conducted andmeasured in the parent’s reporting currency. Thatpremise does not recognize that the assets, liabilities,and operations of foreign entities frequently exist, infact, in other economic and currency environmentsand produce and consume foreign currency cashflows in those other environments. By requiring allforeign currency transactions to be remeasured as ifthey all had occurred in dollars, the “single unit ofmeasure” approach obscures the fact that foreign en-tities acquire assets, incur and settle liabilities, andotherwise conduct their operations in multiple for-eign currencies. Foreign operations are frequentlyconducted exclusively in foreign currencies, and theflow of dollars to the parent enterprise is dependentupon the foreign currency net cash flows generatedby the foreign entity and remitted to the parent. Be-cause it does not accord with relevant economicfacts, reliance on a “single unit of measure” is not al-ways compatible with the nature of foreign opera-tions that is described and discussed in subsequentsections of this basis for conclusions. Accordingly,objective (d) was not adopted.

76. The Board also believes that, to the extent practi-cable, the accounting for the translation of foreigncurrency transactions and financial statements in theUnited States should harmonize with related ac-counting practices followed in other countries of theworld. The Board maintained close liaison with rep-resentatives of the International Accounting Stand-

ards Committee and the accounting standards-settingbodies in Canada and the United Kingdom and Ire-land as this Statement was developed. Representa-tives from each of those groups were active partici-pants with the Board’s foreign currency task force.The Accounting Standards Committee in the UnitedKingdom and Ireland has issued a proposed standardfor foreign currency translation that is compatiblewith the standards set forth in this Statement.

The Functional Currency

77. An entity’s functional currency is the currency ofthe primary economic environment in which the en-tity operates; normally, that is the currency of the en-vironment in which an entity primarily generates andexpends cash.

78. The Board believes that the most meaningfulmeasurement unit for the assets, liabilities, and op-erations of an entity is the currency in which it prima-rily conducts its business, assuming that currency hasreasonable stability.

79. Multinational enterprises may consist of entitiesoperating in a number of economic environmentsand dealing in a number of foreign currencies. Allforeign operations are not alike. In order to fulfillthe objectives adopted by the Board, it is necessaryto recognize at least two broad classes of foreignoperations.

80. In the first class are foreign operations that arerelatively self-contained and integrated within a par-ticular country or economic environment. The day-to-day operations are not dependent upon the eco-nomic environment of the parent’s functionalcurrency; the foreign operation primarily generatesand expends foreign currency. The foreign currencynet cash flows that it generates may be reinvested orconverted and distributed to the parent. For this class,the foreign currency is the functional currency.

81. In the second class are foreign operations that areprimarily a direct and integral component or exten-sion of the parent company’s operations. Significantassets may be acquired from the parent enterprise orotherwise by expending dollars and, similarly, thesale of assets may generate dollars that are availableto the parent. Financing is primarily by the parent orotherwise from dollar sources. In other words, theday-to-day operations are dependent on the eco-nomic environment of the parent’s currency, and thechanges in the foreign entity’s individual assets and


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liabilities impact directly on the cash flows of the par-ent company in the parent’s currency. For this class,the dollar is the functional currency.

82. The Board recognizes that some foreign opera-tions will not fit neatly in either of the two broadclasses described in paragraphs 80 and 81. Manage-ment’s judgment will be required in order to selectthe functional currency in those instances. Guid-ance for management in this process is included inAppendix A.

83. Experience with Statement 8, responses to bothExposure Drafts, and testimony at the public hearingrepeatedly evidenced that no translation method canyield reliable or economically credible results if itfails to recognize differences in economic substanceamong different foreign currency operations. State-ment 8 did not recognize those differences. Implic-itly, the dollar was designated the functional currencyfor all foreign operations. For those operations forwhich the functional currency was, in fact, the for-eign currency, the reported results created by ex-change rate changes did not conform with the under-lying economic facts and were, therefore, notunderstood or not credible.

84. Some allege that the functional currency ap-proach does not “result in similar accounting forsimilar situations.” The Board believes a significantvirtue of that approach is that it provides different ac-counting for significantly different economic facts.Because the facts will sometimes give mixed signals,and because management’s judgment will be re-quired to identify, weigh, and interpret the factswithin the objectives and guidance in this Statement,the Board acknowledges the possibility that, occa-sionally, situations that appear similar may be ac-counted for in different ways. That is always a riskwhen standards must be applied with judgment. TheBoard believes that risk is likely to do less damage tothe usefulness of financial reporting than arbitraryrules that overlook economic differences and requiredifferent situations to be accounted for as though theywere the same.

Consolidation of Foreign Currency Statements

85. Critics of the functional currency approach assertthat it is not consistent with consolidation theory andthat it violates the single entity and “single unit ofmeasure” concepts that they believe underlie consoli-dated financial statements. The Board believes that,for an enterprise operating in multiple currency envi-ronments, a true “single unit of measure” does not, asa factual matter, exist.

86. As noted elsewhere, multiple units of currencyare an economic fact of foreign operations, and atranslation method cannot prevent the effects of mul-tiple units from showing up in financial statements.The temporal method obscures the fact of multipleunits by requiring all transactions to be measured asif the transactions occurred in dollars. As a result, itproduces profit margins and earnings fluctuationsthat do not synchronize with the economic eventsthat affect an entity’s operations.All translation meth-ods, including both the temporal and current ratemethods, involve multiple currency units at the for-eign entity level and a single currency unit, the dollar,at the consolidated reporting level. They only differin how they bridge from multiple units to the singleunit.

87. Proponents of a “single unit of measure” wouldrequire the historical cost of inventories and property,plant, and equipment acquired by a foreign entity in aforeign currency to be measured in terms of theequivalent number of dollars at the date of acquisi-tion; that is, they would translate the foreign currencyacquisition cost using the historical exchange rate.Statement 8 is based on that proposition. At the sametime, however, many of those same proponents rec-ommend that present standards (that is, Statement 8)be improved by requiring the foreign currency acqui-sition cost of inventories to be translated using thecurrent exchange rate. Whether that proposal is pre-sented as a departure from their perception of gener-ally accepted accounting principles that require in-ventories to be measured at historical cost or as adeparture from their perception of a “single unit ofmeasure” is not always clear. Whatever the nature ofthe exception, some of those recommending it wouldhave it apply to all inventories acquired by a foreignentity, others only to inventories for which the last-in,first-out method is not used, others only for inventoryacquired locally, and still others to various combina-tions of those possibilities. No matter how the pro-posal might be applied, it would be impossible toadopt it and retain both the “single unit of measure”and accounting for inventories at historical cost.

88. Statement 8 is frequently described as a faithfulapplication of the “single unit of measure” and thehistorical cost principle. Most agree that the faithfulapplication of the “single unit of measure” and thehistorical cost principle produces results that are notcompatible with the expected economic effects ofchanges in exchange rates. The Board concluded thatfor many foreign entities, adhering to a “single unit ofmeasure” was artificial and illusory.


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89. The Board also considered the assertion made bysome that the functional currency approach is incon-sistent with the presentation of consolidated financialstatements that include the individual financial state-ment elements (that is, assets, liabilities, revenues,expenses, gains, losses, etc.) of foreign entities. Thatassertion seems to be based on the notion that, be-cause the functional currency approach generallyconsiders the relevant economic effect of exchangerate changes to be on the net investment in a foreignentity rather than on certain of its individual financialstatement elements, including in consolidated finan-cial statements the individual elements that underliethat net investment is inappropriate. The Board be-lieves that assertion is without merit.

90. As stated in paragraph 1 of ARB No. 51, Con-solidated Financial Statements:

The purpose of consolidated statements isto present, primarily for the benefit of theshareholders and creditors of the parent com-pany, the results of operations and the finan-cial position of a parent company and its sub-sidiaries essentially as if the group were asingle company with one or more branches ordivisions. There is a presumption that con-solidated statements are more meaningfulthan separate statements and that they areusually necessary for a fair presentation whenone of the companies in the group directly orindirectly has a controlling financial interestin the other companies.

91. The Board agrees with the presumption inARB 51 that presenting in consolidated financialstatements the individual assets, liabilities, revenues,expenses, and other elements that underlie a net in-vestment in a foreign entity in which there is a con-trolling financial interest is indeed more meaningfulthan merely presenting the net investment as a singleitem, as in the parent company’s separate financialstatements. Nothing in the functional currency ap-proach suggests that the various entities that are in-cluded in consolidated financial statements are notcomponents of a single enterprise. The same indi-vidual financial statement elements are aggregated inconsolidated financial statements using the functionalcurrency approach as under the temporal method orany of the other methods found in practice prior toStatement 8. Measures of some of the elements pre-sented in consolidated financial statements differ de-pending on the approach to translation, but the com-ponent entities and elements of the consolidatedenterprise are the same.

92. Some have also suggested that adoption of thefunctional currency approach causes reporting cur-rency measures of items presented in consolidated fi-nancial statements to depart from the historical costmodel found in present practice. The Board has con-cluded that is not the case. Costs are incurred and ex-change transactions take place in the functional cur-rency; the functional currency approach preservesthose historical costs and exchange prices. If thefunctional currency and reporting currency are differ-ent, translation of functional currency historical costsand exchange prices into their current dollar equiva-lent is essential to the process of consolidation, butthe exchange rate changes affect the dollar equiva-lents of those historical costs and exchange prices,not the historical costs and exchange prices actuallyexperienced by the foreign entity. As explained else-where, the Board concluded that the most relevant in-formation about the performance and financial posi-tion of foreign entities is provided by the functionalcurrency financial statements of those entities. Usingthe current exchange rate to restate those functionalcurrency financial statements in terms of their cur-rent dollar equivalents preserves that most relevantinformation.

93. Those who believe that the functional currencyapproach is inconsistent with consolidation prin-ciples sometimes put the argument in terms of a U.S.perspective versus a local perspective. They contendthat the local perspective incorrectly assumes thatU.S. investors and creditors are interested in func-tional currency cash flows rather than in dollar cashflows. To the contrary, the Board has adopted thefunctional currency approach because it believes thatapproach provides the best basis for assessing an en-terprise’s dollar cash flows. The foreign entity’s netcash flows are one source of dollar cash flows. How-ever, it is only after a foreign entity has realized netcash flows in its functional currency that those cashflows can be converted to dollars. For example, theproperty, plant, and equipment of a foreign entity isused directly to produce functional currency rev-enues, and it is only indirectly through the entireearnings process of the foreign entity that the netfunctional currency cash flows become available forconversion into dollar cash flows.

Translation of Foreign Currency Statements

94. Fundamental to the functional currency ap-proach to translation is the view that, generally, aU.S. enterprise is exposed to exchange risk to the ex-tent of its net investment in a foreign operation. This


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view derives from a broad concept of economichedging. An asset, such as plant and equipment, thatproduces revenues in the functional currency of anentity can be an effective hedge of debt that requirespayments in that currency. Therefore, functional cur-rency assets and liabilities hedge one another, andonly the net assets are exposed to exchange risk.

95. If all of a foreign entity’s assets and liabilities aremeasured in its functional currency and are translatedat the current exchange rate, the net accounting effectof a change in the exchange rate is the effect on thenet assets of the entity. That accounting result is com-patible with the broad concept of economic hedgingon which the net investment view is based. No gainsor losses arise from hedged assets and liabilities andthe dollar equivalent of the unhedged net investmentincreases or decreases when the functional currencystrengthens or weakens.

96. If a foreign entity transacts business in a cur-rency other than its functional currency, it is exposedto exchange risk on assets and liabilities denominatedin those currencies. That risk will be reflectedthrough gains and losses in the functional currency.Those gains and losses affect the foreign entity’sfunctional currency net cash flows that may be rein-vested by it or converted and distributed to the parent.That is equally the case for transactions of the foreignentity denominated in the reporting currency.

97. Another aspect of the functional currency ap-proach pertains to the financial results and relation-ships of a foreign entity. The functional currency ap-proach views the parent company as having aninvestment in a foreign business whose foreign cur-rency earnings are generated in its local economic,legal, and political environment and accrue to thebenefit of the parent company in the amount of thedollar equivalent of those earnings. That conceptviews the accounts of the foreign business measuredin its functional currency in accordance with U.S.generally accepted accounting principles as the bestavailable indicators of its performance and financialcondition.

98. A foreign entity’s assets, liabilities, and opera-tions exist in the economic environment of its func-tional currency. Its costs are incurred in its functionalcurrency and its revenues are produced in its func-tional currency. Use of a current exchange rate re-tains those historical costs and other measurementsbut restates them in terms of the reporting currency,thereby preserving the relationships established in the

entity’s economic environment. Accordingly, use ofthe current exchange rate reflects in the consolidatedfinancial statements the inherent relationships ap-pearing in the functional currency financial state-ments. If a foreign entity is producing net income inits functional currency, the dollar equivalent of thatnet income will be reflected in the consolidated fi-nancial statements. If different exchange rates areused for monetary and nonmonetary items, as inStatement 8, the translated dollar results inevitablydiffer from the entity’s functional currency results. Atan extreme, if different rates are used for monetaryand nonmonetary items, the results of operations fora foreign entity that, in fact, is operating profitablyand is generating functional currency net cash flowsmay be converted to a loss merely as a result of themechanical translation process. The Board believesthat by preserving the actual indicators of perform-ance and financial condition of each component en-tity, the consolidated financial statements will portraythe best information about the enterprise as a whole.

99. Paragraph 12 of this Statement requires that aforeign entity’s revenues, expenses, gains, and lossesbe translated in a manner that produces amounts ap-proximately as if the underlying elements had beentranslated on the dates they were recognized (some-times referred to as the weighted average exchangerate). This also applies to accounting allocations (forexample, depreciation, cost of sales, and amortizationof deferred revenues and expenses) and requirestranslation at the current exchange rates applicable tothe dates those allocations are included in revenuesand expenses (that is, not the rates on the dates the re-lated items originated). The objectives of the func-tional currency approach, particularly as expressed inparagraph 70(c), might be best served by applicationof a single current rate, such as the rate at the end ofthe period, to those elements. This would, however,require restating prior interim periods or recording acatch-up adjustment in income if rates change. TheBoard therefore rejected this alternative on practicalgrounds.

100. Translation of the statement of changes in fi-nancial position was the subject of frequent commenton both Exposure Drafts on foreign currency transla-tion. APB Opinion No. 19, Reporting Changes in Fi-nancial Position, permits some flexibility and judg-ment to meet the stated objectives of a statement ofchanges and the Board does not intend to change thateither by prescribing the form and content of the


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statement of changes or by requiring a separate com-pilation of complete information for each foreign op-eration. However, Opinion 19 does require disclosureof all important changes in financial position regard-less of whether cash or working capital is directly af-fected and that requirement is not changed in anyway by this Statement.

[Note: Prior to the adoption of FASB StatementNo. 141 (revised 2007), Business Combinations (ef-fective for business combinations with an acquisi-tion date on or after the beginning of the first an-nual reporting period beginning on or after12/15/08), paragraph 101 should read as follows:]

101. The functional currency approach appliesequally to translation of financial statements of for-eign investees whether accounted for by the equitymethod or consolidated. It also applies to translationafter a business combination. Therefore, the foreignstatements and the foreign currency transactions ofan investee that are accounted for by the equitymethod should be translated in conformity with therequirements of this Statement in applying the equitymethod. Likewise, after a business combination ac-counted for by the purchase method, the amount allo-cated at the date of acquisition to the assets acquiredand the liabilities assumed (including goodwill or[excess over cost,] as those terms are used in FASBStatement No. 141, Business Combinations) shouldbe translated in conformity with the requirements ofthis Statement. Accumulated translation adjustmentsattributable to minority interests should be allocatedto and reported as part of the minority interest in theconsolidated enterprise.

[Note: After the adoption of Statement 141(R) bybusiness entities or the adoption of FASB State-ment No. 164, Not-for-Profit Entities: Mergers andAcquisitions (effective prospectively in the first ini-tial or annual financial statements for a reportingperiod beginning on or after December 15, 2009)by not-for-profit entities, paragraph 101 shouldread as follows:]

101. The functional currency approach appliesequally to translation of financial statements of for-eign investees whether accounted for by the equitymethod or consolidated. It also applies to translationafter a business combination or after a combinationof not-for-profit entities—that is, after an acquisitionof a business or nonprofit activity by a not-for-profitentity or a merger of not-for-profit entities. Therefore,the foreign statements and the foreign currency trans-

actions of an investee that are accounted for by theequity method should be translated in conformitywith the requirements of this Statement in applyingthe equity method. Likewise, after a business combi-nation, the amount assigned at the acquisition date tothe assets acquired and the liabilities assumed (in-cluding goodwill or the gain recognized for a bargainpurchase) should be translated in conformity with therequirements of this Statement. Accumulated transla-tion adjustments attributable to noncontrolling inter-ests should be allocated to and reported as part of thenoncontrolling interest in the consolidated enterprise.

Translation of Operations in Highly InflationaryEconomies

102. Translation of operations in highly inflationaryeconomies is frequently cited as a problem if all as-sets and liabilities are translated using current ex-change rates. In the historical cost model, a reason-ably stable measuring unit is an essential ingredientto useful reporting of financial position and operatingresults over periods of time. Any degree of inflationaffects the usefulness of information measured innominal currency units. If historical costs are meas-ured in nominal currency units in a highly inflation-ary environment, those measures of historical costrapidly lose relevance.

103. Because it is a common condition, users of fi-nancial statements have developed tolerance forsome inflation and in varying degrees compensate forit in their analyses. As inflation increases or persists,however, nominal currency units of the inflationaryenvironment are not useful measures of performanceor investment, and a more stable unit of measuremust be found.

104. The point at which a substitute measuring unitis necessary is a subjective one. It depends on a num-ber of factors, including the current and cumulativerates of inflation and the capital intensiveness of theoperation. In principle, however, a more stable meas-uring unit is always preferable to a less stable one.

105. The Board has considered a number of alterna-tive methods for restating to a more stable measuringunit. None of the methods is completely satisfactoryat this time, either because they are deemed to be in-compatible with the functional currency concept orbecause they involve some aspect of accounting forthe effects of inflation in the basic financial state-ments. Statement 33 calls for experimentation withreporting the effects of inflation on a supplemental


FAS52–24

basis, not in the basic financial statements. Accord-ingly, in the 1980 Exposure Draft, the Board pro-posed not to specify special translation provisions forreporting on operations in highly inflationary econo-mies, pending resolution of the issues being tested insupplemental reporting on the effects of inflation.

106. Virtually every respondent to the 1980 Expo-sure Draft who addressed translation of operations inhighly inflationary economies pointed out that, un-less special provisions are made, the proposed trans-lation method could report misleading results. Ac-cordingly, in the revised Exposure Draft, the Boardproposed that the financial statements of a foreign en-tity with a functional currency of a country that has ahighly inflationary economy be restated to reflectchanges in the general price level in that countryprior to translation. Many respondents objected to therevision, generally on one or more of the followinggrounds:

a. Information restated to reflect changes in thegeneral price level should not be required in theprimary financial statements until and unless theusefulness of that information has beenadequately demonstrated in the Statement 33experiment.

b. The primary financial statements should not mixinformation presented in constant measuringunits that reflect changes in the general price levelwith information presented in nominal monetaryunits.

c. The lack of reliable and timely price-level in-dexes in some highly inflationary economiesconstitutes a significant obstacle to practical ap-plication of the proposal.

107. In view of the difficulties with the proposal, theBoard decided that the practical alternative, recom-mended by many respondents, is to require that thefinancial statements of foreign entities in thoseeconomies that meet the definition of highly infla-tionary be remeasured as if the functional currencywere the reporting currency. This is essentially apragmatic decision. The Board nonetheless believesthat a currency that has largely lost its utility as astore of value cannot be a functional measuring unit.If the reporting currency is more stable, it can be usedas the functional currency without introducing a formof inflation accounting.

108. The revised Exposure Draft also allowed lati-tude for restatement of operations in economies thatare less than highly inflationary. Many respondentsbelieved that this flexibility would significantly re-

duce the consistency and comparability of reportingamong companies. The Board agreed and removedthe latitude in the final Statement.

109. The definition of a highly inflationary economyas one that has cumulative inflation of approximately100 percent or more over a 3-year period is neces-sarily an arbitrary decision. In some instances, thetrend of inflation might be as important as the abso-lute rate. It is the Board’s intention that the definitionof a highly inflationary economy be applied withjudgment.

Translation Adjustments

110. Translation adjustments arise from either con-solidation or equity method accounting for a net in-vestment in another entity having a different func-tional currency from that of the investor.

111. Translation adjustments do not exist in terms offunctional currency cash flows. Translation adjust-ments are solely a result of the translation processand have no direct effect on reporting currency cashflows. Exchange rate changes have an indirect effecton the net investment that may be realized upon saleor liquidation, but that effect is related to the net in-vestment and not to the operations of the investee.Prior to sale or liquidation, that effect is so uncertainand remote as to require that translation adjustmentsarising currently should not be reported as part of op-erating results.

112. Assenting Board members hold two views ofthe nature of translation adjustments. Since bothviews exclude these adjustments from net incomeand include them in equity, the Board did not con-sider it necessary to settle on which view should beaccepted.

113. The first view is described in terms of a parent(investor) with the dollar as the reporting and func-tional currency and an investment position in anotherentity with a functional currency other than the dollar.A change in the exchange rate between the dollar andthe other currency produces a change in the dollarequivalent of the net investment although there is nochange in the net assets of the other entity measuredin its functional currency. A favorable exchange ratechange enhances the dollar equivalent; an unfavor-able exchange rate change reduces the dollar equiva-lent. Accordingly, the translation adjustment reflectsan economic effect of exchange rate changes. How-ever, that change in the dollar equivalent of the net in-vestment is an unrealized enhancement or reduction,


FAS52–25

having no effect on the functional currency net cashflows generated by the foreign entity which may becurrently reinvested or distributed to the parent. Forthat reason, the translation adjustment is reportedseparately from the determination of net income.That adjustment is accumulated separately as part ofequity. Concepts Statement 3 defines comprehensiveincome as the change in equity (net assets) of an en-tity during a period from transactions from nonownersources. The first view considers the translation ad-justment to be an unrealized component of compre-hensive income that, for the reasons given above,should be reported separately from net income.

114. The second view regards the translation adjust-ment as merely a mechanical by-product of the trans-lation process, a process that is essential to providingaggregated information about a consolidated enter-prise. An analogy may be drawn between the cumu-lative foreign currency translation adjustment and thedifference between equity (net assets) measured inconstant dollars and the same net assets measured innominal dollars. Viewed as such, the translation ad-justment for a period should be excluded from the de-termination of net income, reported separately, andincluded as a separate component of equity. In thisrespect, it represents a restatement of previously re-ported equity similar to that developed in constantdollar accounting to restate equity in constant dollarsfrom an earlier date to a current date after a change inthe constant dollar unit of measure has occurred.Concepts Statement 3, in paragraph 58, anticipatedthat such restatements would be made to equity with-out being included in current-period comprehensiveincome.

115. Both views of the nature of translation adjust-ments report the same measure of net income and thesame information about equity. The Board believesits requirements for disposition and disclosure oftranslation adjustments are consistent with bothviews.

116. The Board considered whether at some time theseparately reported component of equity should beincluded in net income. Under the first view, the ad-justments have already been included in comprehen-sive income and should not be included again. Anyelimination of the separate component of equityshould be accomplished by combining the differentclasses of items in equity. Under the second view, thetranslation adjustments are a direct restatement of eq-uity, a form of capital adjustment. It would be con-trary to that view to include them in income at anytime.

117. Some respondents suggested that the transla-tion adjustments be amortized to income over thelives or maturities of the individual assets and liabili-ties of the investee, or some relatively long arbitraryperiod. The Board did not adopt that approach be-cause, as previously stated, translation adjustmentsare unrealized and do not have the characteristics ofitems generally included in determining net income.

118. The 1980 Exposure Draft called for recognitionof translation adjustments in determining net incomebased upon permanent impairment of a net invest-ment. That proposal was reconsidered and rejected.The Board concluded that any required provisionsfor asset-impairment adjustments should be madeprior to translation and consolidation.

119. Pending completion of its project on reportingcomprehensive income, however, the Board decidedto include the accumulated translation adjustments innet income as part of the net gain or loss from sale orcomplete or substantially complete liquidation of therelated investment. Sale and complete or substan-tially complete liquidation were selected becausethose events generally cause a related gain or loss onthe net investment to be recognized in net income atthat time. That procedure recognizes the “unrealized”translation adjustment as a component of net incomewhen it becomes “realized.” Although the informa-tion is probably marginal, the Board believes that thisdisposition is desirable until the concepts of reportingall components of comprehensive income are furtherdeveloped. This disposition also can be considered tobe in line with the existing view that nonowner trans-actions or events that change equity should be recog-nized in net income at some point.

Transaction Gains and Losses

120. A foreign currency transaction is a transactionthat is denominated (requires settlement) in a cur-rency other than the functional currency of an entity.Foreign currency transactions typically result fromthe import or export of goods, services, or capital.Examples include a sale denominated in Swissfrancs, a Swiss franc loan, and the holding of Swissfrancs by an entity whose functional currency is thedollar. Likewise, a Swiss franc denominated transac-tion by a German entity or other entity whose func-tional currency is not the Swiss franc is a foreign cur-rency transaction. For any entity whose functionalcurrency is not the dollar, a dollar-denominated trans-action is also a foreign currency transaction.


FAS52–26

121. The Board has concluded that gains and lossesfrom foreign currency transactions have a differenteconomic nature and therefore require different ac-counting treatment from that applied to adjustmentsarising from translating the financial statements offoreign entities from their functional currencies intothe reporting currency for the purposes of consolida-tion. Accordingly, the accounting requirements fordisposing of transaction gains and losses and transla-tion adjustments are different.

122. Transaction gains or losses arise when mon-etary assets and liabilities (cash, receivables, and pay-ables) are denominated in a currency other than thefunctional currency and the exchange rate betweenthose currencies changes. They can arise at either orboth the parent and the subsidiary entity level.

123. Transaction gains and losses have direct cashflow effects when foreign-denominated monetary as-sets or liabilities are settled in amounts greater or lessthan the functional currency equivalent of the origi-nal transactions.

124. The Board has concluded that such gains orlosses should be reflected in income when the ex-change rates change rather than when the transactionis settled or at some other intermediate date or period.This is consistent with accrual accounting; it resultsin reporting the effect of a rate change that will havecash flow effects when the event causing the effecttakes place.

125. Some have proposed that a transaction gain orloss should be deferred if the rate change that causedit might be reversed before the transaction is settled.The argument is that to recognize transaction gainsand losses from rate changes in determining net in-come creates needless fluctuations in reported in-come if those transaction gains and losses might becanceled by future reversals of rate changes. TheBoard rejected the proposal on both conceptual andpractical grounds. Past rate changes are historicalfacts, and the Board believes that users of financialstatements are best served by accounting for ratechanges that affect the functional currency cash flowsof a foreign entity as those rate changes occur. Theproposal is also impractical; future changes, includ-ing reversals, cannot be reliably predicted. As a re-sult, a transaction gain or loss might ultimately haveto be recognized during a period in which ratechanges are unrelated to the recognized gain or loss.

126. The Board saw no conceptual basis for an alter-native proposal for recognition of transaction gains or

losses when unsettled balances are classified as cur-rent assets and liabilities (or as they became duewithin one year). Such a requirement would placeemphasis on the balance sheet classification or settle-ment date rather than on the economic effect of theexchange rate movement. It would also add a furtheraccounting complexity without a compensatingbenefit.

127. Others have proposed that transaction gains andlosses, particularly those related to long-term debt,should be deferred and amortized over the life of therelated liabilities as part of the costs of borrowing.The Board agrees that transaction gains and losses onamounts borrowed in a different currency might beconsidered part of the cost of the borrowed funds.However, no rational procedure can be prescribed toaccrue the total cost at an average effective rate be-cause until the liability is settled that average ratecannot be objectively determined. Amortization ofthe effect of past exchange rate changes over the re-maining life of the borrowing does not accomplishthat result. It changes the pattern of gain or loss rec-ognition in net income, but it may retain much of thevolatility that advocates seek to eliminate. Further,amortization allocates the effect of an exchangerate change to periods not related in any way tochanges in rates or other economic events affectingthe enterprise.

Foreign Currency Transactions That Hedge aNet Investment

128. Paragraph 20(a) of this Statement provides thattransaction gains and losses attributable to a foreigncurrency transaction that is designated as, and is ef-fective as, an economic hedge of a net investment ina foreign entity shall be reported in the same manneras translation adjustments and that such accountingshall commence as of the designation date. If a for-eign currency transaction is in fact an economichedge of a net investment, then the accounting for theeffect of a rate change on the transaction should bethe same as the accounting for the effect of the ratechange on the net investment, that is, both of thosepartially or fully offsetting amounts should be in-cluded in the separate component of equity.

129. An example of the situation contemplated inparagraph 20(a) would be a U.S. parent companywith a net investment in a subsidiary that is located inSwitzerland and for which the Swiss franc is thefunctional currency. The U.S. parent might also bor-row Swiss francs and designate the Swiss franc loan


FAS52–27

as a hedge of the net investment in the Swiss subsid-iary. The loan is denominated in Swiss francs whichare not the functional currency of the U.S. parent and,therefore, the loan is a foreign currency transaction.The loan is a liability, and the net investment in theSwiss subsidiary is an asset. Subsequent to a changein exchange rates, the adjustment resulting fromtranslation of the Swiss subsidiary’s balance sheetwould go in the opposite direction from the adjust-ment resulting from translation of the U.S. parentcompany’s Swiss franc debt. To the extent that theadjustment from translation of the Swiss franc loan(after tax effects, if any) is less than or equal to theadjustment from translation of the Swiss subsidiary’sbalance sheet, both adjustments should be includedin the analysis of changes in the cumulative transla-tion adjustment and reflected in the separate compo-nent of equity. However, any portion of the adjust-ment from translation of the U.S. parent company’sSwiss franc debt (after tax effects, if any) that ex-ceeds the adjustment from translation of the Swisssubsidiary’s balance sheet is a transaction gain or lossthat should be included in the determination of netincome.

130. Ordinarily, a transaction that hedges a net in-vestment should be denominated in the same cur-rency as the functional currency of the net investmenthedged. In some instances, it may not be practical orfeasible to hedge in the same currency and, therefore,a hedging transaction also may be denominated in acurrency for which the exchange rate generallymoves in tandem with the exchange rate for the func-tional currency of the net investment hedged.

Transaction Gains and Losses Attributable toIntercompany Transactions

131. Paragraph 20(b) of this Statement addressestransaction gains and losses attributable to intercom-pany foreign currency transactions that are of a long-term investment nature. Transactions and balancesfor which settlement is not planned or anticipated inthe foreseeable future are considered to be part of thenet investment. This might include balances that takethe form of an advance or a demand note payableprovided that payment is not planned or anticipatedin the foreseeable future. Accordingly, related gainsor losses are to be reported and accumulated in thesame manner as translation adjustments when finan-cial statements for those entities are consolidated,combined, or accounted for by the equity method.Transaction gains and losses attributable to other in-tercompany transactions and balances, however, af-

fect functional currency cash flows; and increases ordecreases in actual and expected functional currencycash flows should be included in determining net in-come for the period in which exchange rates change.

Foreign Currency Transactions That HedgeForeign Currency Commitments

132. In response to the Board’s invitation for pub-lic comment on Statements 1−12, most of the com-ments received that addressed accounting for for-ward exchange contracts requested that the Board re-consider the requirement that a forward contract mustextend from the foreign currency commitment dateto the anticipated transaction date or a later date if theforward contract is to be accounted for as a hedge ofa foreign currency commitment. Other commenta-tors have requested that transactions other than for-ward exchange contracts (for example, a cash bal-ance) also should be accounted for as a hedge of acommitment.

133. The Board believes that if a foreign currencycommitment is hedged by a forward contract or byany other type of foreign currency transaction, the ac-counting for the foreign currency transaction shouldreflect the economic hedge of the foreign currencycommitment. The existence of an economic hedge isa question of fact, not of form. Therefore, the Boarddid not require any linkage of the date of the hedgingtransaction with the date of the hedged commitment.However, the foreign currency transaction must bedesignated as, and effective as, a hedge of a foreigncurrency commitment. In some instances, it may notbe practical or feasible to hedge in the same currencyand, therefore, a hedging transaction also may be de-nominated in a currency for which the exchange rategenerally moves in tandem with the exchange ratefor the currency in which the hedged commitment isdenominated.

Income Tax Consequences of Rate Changes

134. The Board has concluded that interperiod taxallocation is required if transaction gains and lossesfrom foreign currency transactions are included in in-come in a different period for financial statement pur-poses than for tax purposes. This is consistent withthe requirements of Opinion 11.

135. The Board also has considered the possibleneed to provide deferred taxes related to translationadjustments resulting from translation of functionalcurrency statements. Translation adjustments are ac-cumulated and reported in a separate component of


FAS52–28

equity. Reported as such, translation adjustments donot affect pretax accounting income and most suchadjustments also do not affect taxable income. Ad-justments that do not affect either accounting incomeor taxable income do not create timing differences asdefined by Opinion 11. However, reporting those ad-justments as a component of equity does have the ef-fect of increasing or decreasing equity, that is, in-creasing or decreasing an enterprise’s net assets.Potential future tax effects related to those adjust-ments would partially offset the increase or decreasein net assets. Therefore, the Board decided that tim-ing differences relating to translation adjustmentsshould be accounted for in the same way as timingdifferences relating to accounting income. The needfor and the amount of deferred taxes should be deter-mined according to the other requirements of Opin-ions 11, 23, and 24. For example, paragraph 23 ofthis Statement provides that deferred taxes should notbe provided for translation adjustments attributable toan investment in a foreign entity for which deferredtaxes are not provided on unremitted earnings. Simi-larly, Opinions 11, 23, and 24 provide guidance as tohow to compute the amount of deferred taxes. De-ferred taxes on translation adjustments should becomputed in the same manner.

Elimination of Intercompany Profits

136. An intercompany sale or transfer of inventory,machinery, etc., frequently produces an intercom-pany profit for the selling entity and, likewise, the ac-quiring entity’s cost of the inventory, machinery, etc.,includes a component of intercompany profit. TheBoard considered whether computation of theamount of intercompany profit to be eliminatedshould be based on exchange rates in effect on thedate of the intercompany sale or transfer, or whetherthat computation should be based on exchange ratesas of the date the asset (inventory, machinery, etc.) orthe related expense (cost of sales, depreciation, etc.)is translated.

137. The Board decided that any intercompanyprofit occurs on the date of sale or transfer and thatexchange rates in effect on that date or reasonable ap-proximations thereof should be used to compute theamount of any intercompany profit to be eliminated.The effect of subsequent changes in exchange rateson the transferred asset or the related expense isviewed as being the result of changes in exchangerates rather than being attributable to intercompanyprofit.

Exchange Rates

138. The Board has concluded that if multiple ratesexist, the rate to be used to translate foreign state-ments should be, in the absence of unusual circum-stances, the rate applicable to dividend remittances.Use of that rate is more meaningful than any otherrate because cash flows to the reporting enterprisefrom the foreign entity can be converted at only thatrate, and realization of a net investment in a foreignentity will ultimately be in the form of cash flowsfrom that entity.

139. If a foreign entity’s financial statements are asof a date that is different from that of the enterpriseand they are combined, consolidated, or accountedfor by the equity method in the financial statementsof the enterprise, the Board concluded that for pur-poses of applying the requirements of this Statement,the current rate is the rate in effect at the entity’s bal-ance sheet date. The Board believes that use of thatrate most faithfully presents the dollar equivalent ofthe functional currency performance during the enti-ty’s fiscal period and position at the end of that pe-riod. Paragraph 4 of ARB 51 and paragraph 19(g) ofAPB Opinion No. 18, The Equity Method of Ac-counting for Investments in Common Stock, addressconsolidation and application of the equity methodwhen a parent and a subsidiary have different fiscalperiods. The Board believes its conclusion is consis-tent with those pronouncements.

Use of Averages or Other Methods ofApproximation

140. Paragraph 12 permits the use of average rates totranslate revenues, expenses, gains, and losses. Aver-age rates used should be appropriately weighted bythe volume of functional currency transactions occur-ring during the accounting period. For example, totranslate revenue and expense accounts for an annualperiod, individual revenue and expense accounts foreach quarter or month may be translated at that quar-ter’s or that month’s average rate. The translatedamounts for each quarter or month should then becombined for the annual totals.

Disclosure

141. Paragraph 30 requires disclosure of the aggre-gate transaction gain or loss included in the determi-nation of net income for the period. A transactiongain or loss does not measure, nor is it necessarily anindicator of, the full economic effect of a rate changeon an enterprise. However, the Board believes thatdisclosing the aggregate transaction gain or loss may


FAS52–29

provide information about the effects of rate changesthat is useful in evaluating and comparing reportedresults of operations.

142. Paragraph 31 requires an analysis of the sepa-rate component of equity in which translation adjust-ments, certain transaction gains and losses, and re-lated tax effects are accumulated and reported.Generally accepted accounting principles presentlyrequire an analysis of changes in all equity accounts.Nevertheless, the Board has decided that it shouldspecifically require an analysis of the separate com-ponent of equity disclosing the major changes in eachperiod for which financial statements are presented.The analysis may be presented in a separate financialstatement, in the notes to the financial statements, oras part of the statement of changes in equity. Thisseparate component of equity might be titled “EquityAdjustment from Foreign Currency Translation” orgiven a similar title.

143. The Board considered whether an enterprise’sfinancial statements should be adjusted for a changein rate subsequent to the date of the financial state-ments. The Board concluded that financial state-ments should not be adjusted for such rate changes.However, disclosure of the rate change and the esti-mated effect on unsettled balances pertaining to for-eign currency transactions, if significant, may be nec-essary. If disclosed, the disclosure should includeconsideration of changes in unsettled transactionsfrom the date of the financial statements to the datethe rate changed. The Board recognizes that in somecases it may not be practicable to determine thesechanges; if so, that fact should be stated.

144. The Board considered a proposal for financialstatement disclosure that would describe and possi-bly quantify the effects of rate changes on reportedrevenue and earnings. This type of disclosure mighthave included the mathematical effects of translatingrevenue and expenses at rates that are different fromthose used in a preceding period as well as the eco-nomic effects of rate changes, such as the effects onselling prices, sales volume, and cost structures.Afterconsidering information that it received on this mat-ter, the Board has decided not to require disclosure ofthis type of information, primarily because of thewide variety of potential effects, the perceived diffi-culties of developing the information, and the im-practicality of providing meaningful guidelines.However, the Board encourages management tosupplement the disclosures required by this State-ment with an analysis and discussion of the effects of

rate changes on the reported results of operations.The purpose is to assist financial report users in un-derstanding the broader economic implications ofrate changes and to compare recent results with thoseof prior periods.

Effective Date and Transition

145. The Board considered and rejected both a com-pletely prospective and a completely retroactive ap-plication of the accounting standards required by thisStatement.

146. A completely prospective application was re-jected because continued translation of previouslyacquired nonmonetary assets and related expenses athistorical rates is inconsistent with the Board’s otherdecisions regarding foreign currency translation. Re-garding retroactive application, there are two pos-sible effects resulting from the change to the account-ing requirements of this Statement. Those effects are:

a. An increase or decrease in the enterprise’s net as-sets resulting from translating all of a foreign en-tity’s assets and liabilities at the current exchangerate for that entity’s functional currency.

b. A reclassification between retained earnings andthe new separate component of equity for cumu-lative translation adjustments so that retainedearnings would equal an amount as if, since in-ception, translation adjustments had not been rec-ognized in income and as if expenses related tononmonetary items had not been translated at his-torical rates. (Such a reclassification between re-tained earnings and cumulative translation adjust-ments would have no effect on an enterprise’s netassets or the total amount of equity.)

The Board has decided that the effect on net assets(first possible effect listed above) should be reportedas the opening balance of the separate component ofequity for cumulative translation adjustments as ofthe beginning of the year for which this Statement isfirst applied. Reclassification of amounts between re-tained earnings and the separate component of equity(second possible effect listed above) would requirerecomputation of amounts for all prior years forwhich an enterprise had foreign investments. TheBoard has decided that the benefits of such a recom-putation, even if possible, would not justify the costand should not be required.

147. The Board recognizes that Statement 8 ac-counting exposure has been hedged by the manage-ment of some enterprises and that different manage-ment actions might have been taken if Statement 8


FAS52–30

had not been in effect. Therefore, restatement of fi-nancial statements presented for fiscal years prior tothe effective date of this Statement is not required.However, restatement is permitted and, if the priorfiscal year is not restated, disclosure of income beforeextraordinary items and net income for the prior yearcomputed on a pro forma basis is permitted. If proforma amounts are disclosed, such pro formaamounts should be computed in accordance withOpinion 20.

148. The Board’s decision that this Statement shouldbe effective for fiscal years beginning on or after De-cember 15, 1982 is based on the belief that such aneffective date will provide sufficient time for enter-prises (a) to make any desired changes in financialpolicies that might be prompted by this Statementand (b) to prepare internally for the accounting re-quirements of this Statement. Enterprises that want toadopt the provisions of this Statement at an earlierdate, however, are encouraged to do so. If adoptedfor a fiscal year ending on or before March 31, 1982,disclosure of the effect of adopting the new standardis required to provide comparability between thoseenterprises that do adopt and those that do not adoptthe standard before the effective date. This disclosureis not required for fiscal years ending after March 31,1982 because many enterprises will have terminatedsome or all hedges of the previous Statement 8 ac-counting exposure, thereby rendering any determina-tion of the effect virtually impossible. Furthermore,the cost of requiring two systems of translation be-yond early 1982 is not justified.

149. The Board is considering an amendment ofStatement 33 to provide information that is compat-ible with the functional currency approach to foreigncurrency translation. The Board believes that thetransition provisions of this Statement provide appro-priate flexibility to accommodate any amendment ofStatement 33.

Appendix D

BACKGROUND INFORMATION

150. The extensive currency realignments and themajor revisions of the international monetary systemin the early 1970s, together with the existence inpractice of several significantly different methods ofaccounting for the translation of foreign currencytransactions and financial statements, highlighted theneed to address foreign currency translation at that

time. Statement 8, which was issued in October 1975and was effective for fiscal years that began on or af-ter January 1, 1976, established standards of financialaccounting and reporting for foreign currency trans-lation and eliminated the use of alternative methods.

151. Responding to a recommendation by the Struc-ture Committee of the Financial Accounting Founda-tion that it experiment with a more formal postenact-ment review process, the Board issued in May 1978an invitation for public comment on FASB State-ments 1−12, each of which had been in effect for atleast two years. More than 200 letters were received,and Statement 8 was the subject of most of the com-ments received.

152. Respondents were nearly unanimous in theircall for changes to Statement 8 but had conflictingviews as to what those changes should be. Changeswere suggested both in the method to be used intranslating financial statements and in the method ofdisposition of the resulting translation adjustmentsand transaction gains and losses from foreign cur-rency transactions. Most respondents who suggestedchanges in the translation method also suggestedchanges in the method of recognition of the resultingtranslation effects.

153. Respondents’ concerns with Statement 8 reflectthe perception that the results of translation under thatStatement frequently do not reflect the underlyingeconomic reality of foreign operations. The per-ceived failure of accounting results to portray the un-derlying economic circumstances is underscoredheavily in two respects: (a) the volatility of reportedearnings and (b) the abnormality of financial resultsand relationships. The sources of both problems areattributed to the requirements for (a) current recogni-tion of unrealized exchange adjustments and (b) thatinventories and fixed assets are translated at historicalrates under Statement 8, whereas debt is translated atcurrent rates.

154. Many respondents believe that the exchangerisk exposure on foreign currency debt is effectivelyhedged in many cases by the foreign currency rev-enue potential of operating assets, but that this hedgeis not recognized in the Statement 8 translation proc-ess. One result is large and frequent fluctuations inreported earnings, which many believe misrepresentthe real performance of a company and obscureoperating trends. Another result is said to be erraticoperating margins and irregular financial relation-ships that make operating performance difficult tointerpret.


FAS52–31

155. Recommendations regarding changes in themethod of translation of foreign currency statementswere that some or all nonmonetary assets (primarilyinventories and, less frequently, fixed assets) shouldbe translated at current exchange rates or that long-term debt should be translated at historical rates.

156. The most frequently made recommendationsregarding changes to Statement 8 were for someform of deferral or nonrecognition of the exchangeadjustments that result from its application. Some re-spondents stated that exchange rates are affected byrumor, politics, speculation, and other factors so thatforeign currency exchange rates at any particular mo-ment in time are temporary, and that changes over arelatively short time span are not likely to have along-term effect on a company’s earnings or financialposition. Those respondents believe that exchangeadjustments resulting from transitory rate changesare subject to misinterpretation because short-termrate fluctuations are poor indicators of long-termtrends. Moreover, many of those respondents indi-cated that exchange adjustments from translation offoreign currency statements have not been realizedand often will never be realized in amounts approxi-mating the amounts reported in financial statementsas required by Statement 8.

157. In January 1979, after considering the FASBstaff’s analysis of the comment letters, the Boardadded to its agenda a project to reconsider State-ment 8. In February 1979, a task force was appointedto advise the Board during its deliberations on thisproject. The task force is composed of 22 membersand observers from academe, the financial commu-nity, government, industry, and public accounting, aswell as representatives from the International Ac-counting Standards Committee, the AccountingStandards Committee of the United Kingdom andIreland, and the Canadian Institute of CharteredAccountants.

158. Subsequently, foreign currency translation wasaddressed at 18 public Board meetings and at 4 pub-lic task force meetings. In August 1980, the Board is-sued an Exposure Draft that set forth new proposalsfor foreign currency translation.

159. The Exposure Draft had a 3-month commentperiod, and more than 360 comment letters were re-ceived. The Board conducted a public hearing on theExposure Draft in December 1980, and 47 organiza-tions and individuals presented their views at the4-day hearing.

160. Between January and June 1981, foreign cur-rency translation was addressed at four additionalpublic Board meetings and one public task forcemeeting. The Board’s consideration of the issues re-sulted in modifications that the Board believed weresignificant in the aggregate. Accordingly, a revisedExposure Draft was issued on June 30, 1981.

161. The revised Exposure Draft had a 90-day com-ment period, and more than 260 comment letterswere received. In October and November 1981, for-eign currency translation was addressed at two addi-tional public Board meetings and one public taskforce meeting. Consideration of the written com-ments resulted in further modifications as reflected inthis Statement.

Appendix E

GLOSSARY

162. This appendix defines terms that are essential toclear comprehension of this Statement. They are setin boldface type the first time they appear in thisStatement.

AttributeThe quantifiable characteristic of an item that ismeasured for accounting purposes. For example,historical cost and current cost are attributes of anasset.

ConversionThe exchange of one currency for another.

Current Exchange RateThe current exchange rate is the rate at which oneunit of a currency can be exchanged for (con-verted into) another currency. For purposes oftranslation of financial statements referred to inthis Statement, the current exchange rate is therate as of the end of the period covered by the fi-nancial statements or as of the dates of recogni-tion in those statements in the case of revenues,expenses, gains, and losses. The requirements forapplying the current exchange rate for translatingfinancial statements are set forth in paragraph 12.Further information regarding exchange rates isprovided in paragraphs 26−28.

EnterpriseSee Reporting Enterprise.


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EntitySee Foreign Entity.

Foreign CurrencyA currency other than the functional currency ofthe entity being referred to (for example, the dol-lar could be a foreign currency for a foreign en-tity). Composites of currencies, such as the Spe-cial Drawing Rights on the InternationalMonetary Fund (SDRs), used to set prices or de-nominate amounts of loans, etc., have the charac-teristics of foreign currency for purposes of ap-plying this Statement.

Foreign Currency StatementsFinancial statements that employ as the unit ofmeasure a functional currency that is not the re-porting currency of the enterprise.

Foreign Currency TransactionsTransactions whose terms are denominated in acurrency other than the entity’s functional cur-rency. Foreign currency transactions arise whenan enterprise (a) buys or sells on credit goods orservices whose prices are denominated in foreigncurrency, (b) borrows or lends funds and theamounts payable or receivable are denominatedin foreign currency, (c) is a party to an unper-formed forward exchange contract, or (d) forother reasons, acquires or disposes of assets, orincurs or settles liabilities denominated in foreigncurrency.

Foreign Currency TranslationThe process of expressing in the reporting cur-rency of the enterprise those amounts that are de-nominated or measured in a different currency.

Foreign EntityAn operation (for example, subsidiary, division,branch, joint venture, etc.) whose financial state-ments (a) are prepared in a currency other thanthe reporting currency of the reporting enterpriseand (b) are combined or consolidated with or ac-counted for on the equity basis in the financialstatements of the reporting enterprise.

Functional CurrencyAn entity’s functional currency is the currency ofthe primary economic environment in which the

entity operates; normally, that is the currency ofthe environment in which an entity primarilygenerates and expends cash. (See Appendix A.)

Local CurrencyThe currency of a particular country being re-ferred to.

Reporting CurrencyThe currency in which an enterprise prepares itsfinancial statements.

Reporting EnterpriseAn entity or group whose financial statements arebeing referred to. In this Statement, those finan-cial statements reflect (a) the financial statementsof one or more foreign operations by combina-tion, consolidation, or equity accounting; (b) for-eign currency transactions; or (c) both of theforegoing.

Spot RateThe exchange rate for immediate delivery of cur-rencies exchanged.

Transaction DateThe date at which a transaction (for example, asale or purchase of merchandise or services) is re-corded in accounting records in conformity withgenerally accepted accounting principles. A long-term commitment may have more than one trans-action date (for example, the due date of eachprogress payment under a construction contract isan anticipated transaction date).

Transaction Gain or LossTransaction gains or losses result from a changein exchange rates between the functional cur-rency and the currency in which a foreign cur-rency transaction is denominated. They representan increase or decrease in (a) the actual functionalcurrency cash flows realized upon settlement offoreign currency transactions and (b) the ex-pected functional currency cash flows on un-settled foreign currency transactions.

TranslationSee Foreign Currency Translation.


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Translation AdjustmentsTranslation adjustments result from the proc-ess of translating financial statements from theentity’s functional currency into the reportingcurrency.

Unit of MeasureThe currency in which assets, liabilities, rev-enues, expenses, gains, and losses are measured.


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ORIGINAL PRONOUNCEMENTS - FASB