Comparison between U.S. GAAP and International ... - Grant Thornton

Comparison between U.S. GAAP and International Financial Reporting Standards 128
10. Other matters
10.1 Foreign currency translation
IFRS
U.S. GAAP
Relevant guidance: IAS 21, 29, and 39; IFRIC 16 Relevant guidance: ASC 740, 830, and 815
Introduction
An entity may carry on foreign activities in two ways. It
may have transactions in foreign currencies or it may
have foreign operations. In addition, an entity may present
its financial statements in a foreign currency. The
objective of IAS 21 is to prescribe how to include foreign
currency transactions and foreign operations in the
financial statements of an entity and how to translate
financial statements into a presentation currency
(IAS 21.1).
IAS 21.3(a) excludes from its scope certain derivative
transactions and balances that are within the scope of
IAS 39.
Presentation currency is the currency in which the
financial statements are presented and it is essentially a
matter of choice. The presentation currency of a reporting
entity may be any currency (or currencies)
(IAS 21.8 and .18). Financial statements must be
prepared in the entity's functional currency but may then
be presented in any currency (IAS 21.20-.26 and .38-.43).
Functional currency is the currency of the primary
economic environment in which the entity operates. All
other currencies are then treated as foreign currencies.
(IAS 21.8). The primary economic environment in which
an entity operates is normally the one in which it primarily
generates and expends cash (IAS 21.9). IAS 21.9-.14
contains extensive guidance (including primary and
secondary indicators) on the determination of the
functional currency (which is not a matter of choice). Once
determined, the functional currency is not changed unless
there is a change in the underlying transactions, events,
and conditions (IAS 21.13).
The functional currency translation approach adopted in
ASC 830 encompasses:
• Identifying the functional currency of the entity’s
economic environment
• Measuring all elements of the financial statements
in the functional currency
• Using the current exchange rate for translation
from the functional currency to the reporting
currency, if they are different
• 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 the functional currency
ASC 830 excludes from its scope freestanding foreign
currency derivatives and certain foreign currency
derivatives embedded in other instruments that are
within the scope of ASC 815-20-15.
Reporting currency is the currency in which an
enterprise prepares its financial statements. Unlike
IFRS, U.S. GAAP does not indicate that an entity can
have more than one reporting currency. (ASC Master
Glossary, “Reporting Currency”).
Foreign currency translation is the process of
expressing in the reporting currency of the enterprise
those amounts that are denominated or measured in a
different currency (ASC Master Glossary, “Foreign
Currency Translation”).
Functional currency is the currency of the primary
economic environment in which that entity operates.
Normally, it will be the currency of the economic
environment in which cash is generated and expended
by the entity (ASC Master Glossary, “Functional
Currency”). The foreign currency is a currency other
than the functional currency of the entity being referred
to (ASC Master Glossary, “Foreign Currency”).
The functional currency (or currencies) of an entity is
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