FOREIGN CURRENCY TRANSLATION (Parts I and II)

1. Distinguish between the translation and conversion of foreign currency

Foreign currency translation The process is repeated presentation of financial information from one currency to another currency. While foreign currency conversion between the exchange of one currency to another currency physically.

The difference is, the translation is simply a change of monetary units, for example, on a balance sheet that is expressed in British pounds are presented back to the U.S. dollar equivalent value. There is no physical exchange that occurred, and no relevant transaction occurs. While the conversion, allowing the physical exchanges that occur and there is a related transaction occurring.

Reason translational

Another reason:

• Take note of the foreign exchange transactions

• Reporting the activities of international branches and subsidiaries

• Reporting the results of independent operations overseas

• Terminology

CONVERSION
•    Translation is not equal to the Conversion.

•    Conversion: physical exchange takes place between currencies

•    Translation only change in monetary units.

•    There is no physical exchange that occurred.

• There are no related transactions that occur, like when done conversion.
•    The value of domestic equivalent of foreign currency obtained by multiplying the balance in foreign currency with the direct exchange rate quota.

• Terminology

2. Understanding the terms in the translation of foreign currency.

1.      Conversion, an exchange of one currency into another currency.
Exchange rate now, the exchange rate prevailing on the date of the relevant financial .

2.      Net asset position at risk, the excess assets are measured or denominated in foreign   currency and in  at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.

3.      Exchange forward contracts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.

4.      Functional currency, is the main currency used by a company in the conduct of business activities.

5.      Usually such currency is the currency of the State where the company is located.

6.      Historical exchange rate, the exchange value of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.

7.      Reporting currency, the currency used in preparing the company financial statements.

8.      Spot exchange rate, the exchange rate for currency exchange in the time immediately.

9.      Translation adjustments, the adjustments arising from the translation of financial statements of a company's functional currency into the reporting currency.

Glossary of foreign currency translation, adapted from GAAP (SFAS) No.52, 1981.

1. Attributes, quantitative characteristics of an item being measured for accounting purposes. Example, historical cost and replacement cost which is an attribute of an asset.

2. Conversion, a currency into another currency.

3. Present exchange rate, exchange rate prevailing on the date of the relevant financial statements.
4. Discount, while the subsequent exchange rate lower than current levels.

5. Net asset position at risk, as measured in excess of assets or denominated in foreign currencies and translated at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.

6. Foreign currency, a currency other than the currency used by a State, a currency other than the reporting currency used by the company.

7. Financial statements in foreign currencies, the financial statements using foreign currency as the unit of measurement.

8. Foreign currency transactions, the transaction (ie sale or purchase of goods or services, or debt loans or accounts receivable) under the conditions stated in currencies other than the functional currency of the company.

9. Foreign currency translation, the process to declare the amounts denominated or measured in one currency into another currency using the exchange rate between two currencies.

10. Foreign operation, an operation that produces financial statements that (1) combined or consolidated or accounted for under the equity method in reporting the company's financial statements and (2) arranged in foreign currencies other than the reporting currency of the reporting enterprise.

3. Knowing the differences advantages and disadvantages of foreign currency translation.

Translation gains and losses reflect increases and decreases in the equity of foreign investment in domestic currency and should be recognized, whereas
Gains and losses arising from foreign exchange transactions. Transaction gains and losses are presented in l L / R current year profit and loss in postal currency transactions, the accounting treatment because international adjustments are as diverse as translation procedures behind them. Therefore, solutions that make sense to the problem of how to treat the "profit or loss" of this translation is needed.

Approaches for accounting for translational adjustment of the approach initiated deferral (delay) to an approach that does not require a delay at all, with treatments of hybrid between the two. Major  translation adjustments in the profit goes to the general public was opposed on the grounds that the adjustments are just a product of the process of re-presentation. Namely, the changes in the domestic currency equivalent of the net assets of overseas subsidiaries 'unrealized', has no effect on the local currency cash flows generated by overseas entities that may be re-invested or paid back to the parent company. Incorporate such adjustments in current earnings, thus, be misleading. In these situations, must be accumulated translation adjustments separately as part of consolidated equity.

If the point of view of local currency to be used (local companies viewpoint), the entry of the translation adjustment in current earnings do not need to be done. Enter translation gains and losses in earnings will distort the real financial relationships and can mislead the users of such information. Translation gains or losses should be treated from the standpoint of local currency as an adjustment to equity reporting currency is the unit of measurement of the parent company financial statements are translated (the parent company's point of view), it is advisable to recognize gain or loss on translation of profit as soon as possible. Point of view of the parent company saw overseas subsidiaries as an extension of its parent company. Translation gains and losses reflect the increase or decrease in equity of foreign investment in domestic currency and should be recognized.

4. Calculate gains and losses of foreign currency translation.

Now is the time to learn how to calculate gains and losses from transactions performed. We know that internet traders enter the market with the help of the international currency for the company that manages transactions for traders to open an account in U.S. Dollars. To be able to work in the trader must transfer the amount of initial money into the account. All gains and losses regardless of the currency in a transaction currency, converted into U.S. Dollars. In this chapter we will consider in detail the principles of profit and loss estimation.
In the general case the formula for calculating financial results after the transaction looks as follows:

The financial results = (purchase price - the sales price) * number of lots * lot size - lot size ± commission * bank interest

Clearly the financial results consists of three parts: the results of trading, commission paid and bank interest.

We know that there are two types of quotes in the (do not take into account the cross-rates) - the direct and indirect quotations. In the first case, the base currency is the foreign currency quotations relating to the U.S. dollar and declared  in U.S. Dollars. In the second case, the U.S. Dollar is the base currency itself and is expressed in units of foreign currency. Trading results in the formula given above is calculated in the currency. Commissions and interest rates are usually expressed in U.S. dollar, so the formula is true only for direct quotations. It is worth mentioning that in this formula the purchase and sale price is not a component of the quotation, but the real price we buy or sell currencies, regardless of previous operations (buying or selling). If the positive financial results, we get profitability. If negative, we lose.

For indirect quotation difference between the purchase and sale price expressed in foreign currency, while the total financial results in U.S. Dollars. So to calculate the financial result in the indirect quotation we should use the following formula:

The financial results = (1/price purchases - sales 1/price) * lot * number of lot size - lot size ± commission * bank interest

Lot size depends on the particular quotation (in the currency pair) and the preference of certain internet brokers. The formula shown above is used, if the lot size expressed in foreign currency (not U.S. Dollars). For example, lot size in a direct quotation EUR / USD could be 70 000 pounds sterling. Or lot size in the indirect quotation USD / JPY could be 12.5 million Japanese Yen. If your Internet broker showing the lot size in the U.S. dollar, then you will need to convert U.S. Dollar in the appropriate currency. Lot size is expressed in foreign currencies in such cases will not be determined, but will depend on the relevant date at the opening position. In U.S. dollar standard lot size is usually equal to 100 000. Estimated financial results in the cross rates occur in other ways. As we learned from the previous chapter, cross rates - currency rate against each other except the U.S. Dollar. Each cross rate can be shown by two quotations, the U.S. Dollar. For example, the cross rate of EUR / JPY can be calculated with the quotation EUR / USD and USD / JPY. Calculation of gains and losses occur in the following way. First, the expected financial results for the quotation EUR / USD, the financial results for the USD / JPY. These results are summed to obtain total financial results.

As we all know, currency rate changes with the points. In the quotations of different sizes and various points. Open a transaction, one must know the outcome when the price changes by 1 point in the equality of the U.S. Dollar. This will help to assess the advantages or disadvantages of your current position and closing on time. You can easily do so by using the formula given above and the value will depend on the type of quotations (direct or indirect), lot size, lot of currency in which the value expressed in points.
Let's consider a direct quotation EUR / USD with a size of 1 lot in the amount of 70 000 pounds sterling and a value of 0.0001 points. Because of the direct quotations, we use the first formula for the calculation of trading results. Minimal difference between the buying and selling is always a point, and in this case is 0.0001. Thus, the results of changes in the level of trading the currency pair GBP / USD in the first lot with 1 points is 0.0001 * 70 000 = 7 U.S. Dollars.

Let us examine the indirect quotation USD / JPY with a lot size of 12.5 million yen, and the size of 0.01 points. Due to the indirect quotation, we use the second formula to assess the results of trading. It is not enough to just know the pip value in indirect quotations, because the results also depend on the trading price of the purchase and sale. Suppose that the current level is 104.75 Japanese Yen for one U.S. Dollar. Thus, the trading price changes in the volume of one lot with one point is ((1/104, 75 - 1/104, 76) * 12 500 000 = 11.39 U.S. Dollars. Worthy called that when buying and selling prices are different then trading results are also different. If the lot size stated in U.S. Dollars, then we have to convert them to the Japanese Yen to the current price at the opening position. And if someone opens the purchase positions (buying dollars for yen), the calculation will be done at a price sales, and if the position of sales (sales dollar to yen), it will be the purchase price.

As we can observe, the price change in a different currency pairs with one point leads to varying trading results. In the quotation EUR / USD it is less than USD / JPY. Diminishing the level of trading unchanged at one point, the less damage you will get if there is an unfavorable price movements. But on the other hand, you will have less benefit if you get the Lady Luck. Recommended traders to work with a quotation that is less "aggressive" like the GBP / USD and USD / CHF.

5. Understanding the effect of using various methods of foreign currency translation of financial statements.

The following third exchange rate used during the translation of balances in foreign currencies into their domestic currency. First, this exchange is the exchange rate at the date of the financial statements. Second, the historical exchange rate is the exchange rate at the time an asset is denominated in foreign currency was first acquired, or when a foreign currency liabilities in the first place. Finally, the average rate is a simple average or weighted exchange rate or exchange rate is now historical. Influence the use of historical exchange rate compared to the exchange rate is now on the financial statements when used as foreign currency translation. Historical exchange rate generally maintain the initial cost is equivalent to an item in a foreign currency denominated in domestic currency reports.

Single Rate Method

Based on this translational approach, the financial statements of foreign operations, which are considered by the parent company as an autonomous entity, has the reporting of their own domicile. This is a local accounting environment where foreign affiliates are his business affairs. To maintain the "flavor" of the local currency reports, a way must be found so that translation can be implemented with minimal distortion. The best way is the use of the method of exchange rate policies.

Since all financial reports of foreign exchange is actually multiplied , this translation method to maintain its financial results and the original relation ( financial ratios) in the consolidated statements of individual entities that are consolidated. Only the form of overseas estimates, not the essence, the change in the method of exchange rate policies.
Although interesting and conceptually simple, the method of exchange rate policies were blamed by some people because it undermines the basic purpose of the consolidated financial statements, that is because it presents, for the benefit of shareholders of the parent company, operating results and financial position of the parent company and firms from the perspective of children the single currency. maintain the parent company's reporting currency as the unit of measurement. In the prevailing exchange rate method, the results will reflect the consolidation of -exchange perspective of each country where companies are children. For example, if an asset dip =  an overseas subsidiary company for when the rate was 1.000 VA VA 1 = $ 1, then from the perspective of historical cost dollars is $ 1,000; from the perspective of local currency is also $ 1000. If the exchange rate changed to VA 5 = $ 1, the historical cost of those assets from the perspective of the dollar (historical cost) remains $ 1,000. If the local currency will be retained as the unit of measurement, will be expressed assets of $ 200 (exchange rate translation effect).

Rate method applies also to blame because it assumes that all assets are influenced by local-currency exchange rate risk (assuming that the fluctuations in the domestic currency equivalent, which is caused by fluctuations translational running, an indicator of changes in the intrinsic value of those assets). Hat is rarely true because the value of inventory and fixed assets in foreign countries are generally supported by local inflation.

Multiple Rate Methods

Methods of combining multiple exchange rate exchange rate historically runs and in the process of translation. 3 Such methods are discussed below.
Force-historical method. Based on the true-historical approach, which is popular in the U.S. and other places before the year 1976, current assets and current liabilities of a subsidiary abroad are translated into the reporting currency using the exchange rate of its parent company applies. Assets and liabilities are non-smooth translated with historical rates.
Items of income statement, except for depreciation and amortization, are translated at the exchange rate on average each month of operation or on the basis of the weighted average of the entire period to be reported. Depreciation and amortization are translated using historical exchange rates prevailing at the time of the relevant asset is obtained.
This methodology is, unfortunately, has some drawbacks. For example, this method is less choose a conceptual justification. Existing definitions of assets and liabilities and non-current classification does not explain why such a manner which will determine the exchange rate used in the process.

Monetary-nonmonetary method. As with any true-historical method, the method musing pattern-classification of non-monetary balance sheet to determine the appropriate exchange rate translation.

Due to monetary items in cash settled; usage rate applicable to translate the items of foreign exchange domestic currency equivalent yield that reflects the realizable value or value of the method according to the temporal approach, translational currency conversion is a process of measurement (repeated presentation of a particular value). Therefore, this method can not be used to change the attributes of an item that is being measured; this method can only change the unit of measurement. Balance of foreign currency translation, for example, just change the (restate) the denomination of inventory. not the actual assessment. In U.S. GAAP, assets are measured based on  cash on hand at the balance sheet date. Receivables and payables expressed in a number expected to be received or paid at maturity. Liabilities and other assets are measured at the prevailing price when the item is acquired or item ¬ occurs (historical price). Even so, some of which are measured by the prices prevailing at the date of financial statements (the price goes), such as inventory under the rules of cost or market. In short, there is a dimension of time associated with the values ​​of this money.

By Lorensen, the best way to maintain accounting bases are used to measure these items is to translate the foreign currency amount of foreign currency at the exchange rate prevailing on the date of the measurement of foreign currency takes place. Temporal principle thus stated that cash, receivables, and payables are measured at the promised amount should be translated using the exchange rates prevailing at balance sheet date. Assets and liabilities are measured at the price of money should be translated using the exchange rates prevailing on the date with respect to the price of money.

Although most of the technical issues in accounting tends to resolve itself over time, foreign currency translation is an exception. That this trend will continue to be supported by such developments as the collapse of the dominance of the dollar, the currency rate movements are approved by the government, and the globalization of world capital markets, which have increased the importance of reporting and financial disclosure. Such developments have profoundly increased interest ¬ executive-financial executives, accountants, and financial community on the importance and economic consequences of foreign currency translation. Let us look at the nature and development of international accounting puzzle this puzzle.

6. Evaluating and selecting foreign currency translation method best suits the business and financial market conditions.

Under the temporal method, monetary items such as cash, receivables, and liabilities are translated based on the exchange now. Such items are translated at the exchange rate of monetary base that maintains in the first measurement. In particular, the value of assets in foreign currencies are reported at historical cost, are translated based on the historical exchange rate. Why is that? This is because historical cost in foreign currencies are translated at the exchange rate exchange rate historically produces historical cost in domestic currency.
These four methods discussed at one time been used in the United States and can be found even today in many countries. In general, these methods lead to the translation of foreign currency which is quite different. The first three methods (method of exchange rate now, the method now-non-date, and method-monetary non-monetary) are used in the identification of assets and liabilities which are at risk or may be protected from foreign exchange risk. Then, the translation method applied consistently by taking into account these differences.
So far this term the exchange rate used in translation method refers to the historical or present exchange rate. The average rate is often used in the income statement for the posts load. Some countries use the exchange rate is different for different transactions. In this situation should be selected some existing exchange rate. Some suggested alternatives are:

1. rate of dividend payment

2. free market rate, and

3. penalty rates or preferences that can be used, such as those involved in import export activities.

7. Understanding the relationship between the translations of foreign currency with inflation.

The use of the exchange rate is now to translate the cost of non-monetary assets are located in  environment will ultimately lead to an equivalent value in domestic currency is much lower than the initial baseline measurement. At the same time, earnings will be much larger translated with respect to load which is also lower. The translation as it can be more easily mislead readers as to give information to the reader. Assessment of the lower dollar typically lower earnings power of foreign assets which are supported by local inflation and the ratio of return on investment that affected inflation in a foreign operation may create false expectations on future profits.

FASB rejected before the inflation adjustment process of translation, because the adjustment is not inconsistent with the historical cost basis of the assessment framework used in the basic financial statements in the U.S.. As a solution FAS No. 52 requires the use of the U.S. dollar as the functional currency for those residing overseas operations with hyperinflation environment. This procedure will maintain a constant value of the dollar equivalent of foreign currency assets, because these assets will be translated according to the historical rate. The imposition of losses on fixed assets in the translation of foreign currency to equity shareholders will cause a significant effect on financial ratios. Foreign currency translation problem can not be separated from the problem of accounting for foreign inflation.