U.S. GAAP v. IFRS: The Basics - Financial Executives International

Foreign Currency Matters
Similarities
FAS 52 Foreign Currency Translation and IAS 21 The Effects of Changes in Foreign Exchange
Rates are quite similar in their approach to foreign currency translation. While the guidance
provided by each for evaluating the functional currency of an entity is different, it generally results
in the same determination (that is, the currency of the entity’s primary economic environment). Both
GAAPs generally consider the same economies to be hyperinflationary, although the accounting for
an entity operating in such an environment can be very different.
Both GAAPs require foreign currency transactions of an entity to be remeasured into its functional
currency with amounts resulting from changes in exchange rates being reported in income. Once a
subsidiary’s financial statements are remeasured into its functional currency, both standards require
translation into its parent’s functional currency with assets and liabilities being translated at the
period-end rate, and income statement amounts generally at the average rate, with the exchange
differences reported in equity. Both standards also permit the hedging of that net investment with
exchange differences from the hedging instrument offsetting the translation amounts reported in
equity. The cumulative translation amounts reported in equity are reflected in income when there is
a sale, or complete liquidation or abandonment of the foreign operation, but there are differences
between the two standards when the investment in the foreign operation is reduced through
dividends or repayment of long-term advances as indicated below.
Significant Differences
Translation/functional
currency of foreign operations
in a hyperinflationary economy
Treatment of translation
difference in equity when
a partial return of a foreign
investment is made to the
parent
U.S. GAAP IFRS
Local functional currency financial
statements are remeasured as if the
functional currency was the reporting
currency (U.S. dollar in the case of a
U.S. parent) with resulting exchange
differences recognized in income.
Translation difference in equity is
recognized in income only upon sale (full
or partial), or complete liquidation or
abandonment of the foreign subsidiary.
No recognition is made when there is a
partial return of investment to the parent.
24 u.s. gaaP v. iFrs: t h E Basics
Local functional currency financial
statements (current and prior period) are
indexed using a general price index, and
then translated to the reporting currency at
the current rate.
A return of investment (for example,
dividend) is treated as a partial disposal of
the foreign investment and a proportionate
share of the translation difference is
recognized in income.