The functional currency is the currency of the primary economic environment in which the entity operates.
- Foreign currency transactions are fixed in a currency other than the functional currency. They are recorded at the exchange rate in effect on the date the transaction was initially recognized.
- Transaction gains and losses resulting from a change in the exchange rate between the date the transaction was recognized, the date of the financial statements, and the date the transaction settled. They are included in income in the period the exchange rate changes.
- If the monetary aspect of the transaction has not occurred at the end of the period, monetary items (e.g., accounts payable and accounts receivable) are measured at the period-end exchange rate.
Foreign currency translation is needed to convert foreign currency amounts into units of the reporting currency (the currency in which an entity prepares its financial statements).
- Assets and liabilities are translated at the exchange rate at fiscal year-end.
- Income statement items are translated at the rates in effect when they were recognized. However, a weighted-average rate for the period may be used for these
- Foreign currency translation gains and losses are reported in other comprehensive income.
If the books of a foreign entity are maintained in a currency other than the functional currency, foreign currency amounts must first be remeasured into the functional currency as follows:
- Monetary items at the current rate and
- Nonmonetary items at the historical rate.
- Any gain or loss on remeasurement of monetary assets and liabilities is recognized in earnings.
