Financial statement remeasurement

Even when a foreign entity’s functional currency is changed for consolidation purposes, it will typically continue to transact in the local currency and maintain its financial records in the local currency (i.e., the general ledger balances remain in the local currency).

Excerpt from ASC 830-10-45-17

If an entity’s books of record are not maintained in its functional currency, remeasurement into the functional currency is required. That remeasurement is required before translation into the reporting currency.

Based on the guidance in ASC 830-10-45-17, nonmonetary assets and liabilities and the related expenses (e.g., depreciation) should be remeasured at historical exchange rates. Monetary assets and liabilities denominated in a currency other than the new functional currency should be remeasured using current exchange rates. The resulting gains and losses should be reported in net income. Any transaction gains and losses recognized by the foreign entity in its local currency books and records related to monetary assets and liabilities denominated in its new functional currency (or other currencies) should be reversed (or adjusted) in the remeasurement process.

When the immediate parent of the foreign entity is the reporting entity (i.e., the foreign entity is a first-tier entity), only remeasurement into the functional currency is required. It is not necessary to translate the financial statements because they are already in the parent’s reporting currency. However, if the foreign entity is a second-tier entity (or lower), the financial statements should first be remeasured into the functional currency of the immediate parent and then translated into the currency of the next highest entity, or the reporting entity, whichever comes next in the

organizational structure of the reporting entity.

The following example illustrates the remeasurement of financial statements when an entity maintains its books and records in a currency other than its functional

currency.

EXAMPLE 6-2

Remeasurement of financial statements when books and records are maintained in a currency other than the functional currency

This example is a continuation of Example 6-1. Bela Inc continues to maintain its books and records in the local currency, Belarusian rubles.

At the end of the period following Bela Inc’s adoption of the U.S. dollar as its

functional currency, the spot exchange rate is USD 1 = BYR 900. In addition, Bela Inc:

□ Did not produce any additional inventory; therefore, inventory sold during the period was recorded at the exchange rate in effect at the date Bela Inc transitioned to a functional currency of U.S. dollars (USD 1 = BYR 800).

□ Did not have any changes in the balance of its USD 1,000 loan from USA Corp.

The loan is recorded on the Bela Inc balance sheet (prepared in Belarusian rubles) at BYR 900,000 (USD 1,000 at the period end exchange rate of USD 1 = BYR 900).

□ Did not have any fixed asset additions during the period. Depreciation expense was BYR 100,000 and was recognized in the USD income statement using the exchange rate upon adoption of highly inflationary accounting.

How should Bela Inc remeasure its financial statements into U.S. dollars for the period ended 12/31/X2?

Analysis:

□ Monetary account balances should be remeasured at the current exchange rate (USD 1 = BYR 900).

□ Nonmonetary accounts should be measured using the historical exchange rate, which is the rate that was in place when the new accounting basis was established at the time the country’s economy became highly inflationary (USD 1 = BYR 800).

The income tax expense impact created by using the historical rate instead of the average rate for purposes of preparing the USD financial statements has been ignored.

□ Equity accounts, with the exception of retained earnings, should be measured at the historical exchange rate in effect when the balances were established (e.g., when common stock was issued).

□ The retained earnings generated prior to the point of changing the functional currency should be calculated based on an aggregation of the translated amounts

□ The income statement was remeasured using the average rate for the period (USD 1 =BYR 870) with the exception of those accounts that relate to nonmonetary assets or liabilities (cost of goods sold, depreciation expense) which should be recorded at the exchange rate in effect when the asset or liability was established.

In this example, no inventory was produced and no fixed assets were acquired in the current period; therefore, these expenses are recorded at the exchange rate in effect when Bela Inc adopted the U.S. dollar as its functional currency (USD 1 = BYR 800).

□ The foreign currency gain or loss recorded in Bela Inc’s Belarusian ruble income statement is calculated by comparing the change in the balance of the U.S. dollar denominated loan from the beginning of the period (BYR 800,000) to the end of the period (BYR 900,000). This loss will be reversed in the remeasurement process to create the USD functional financial statements because the loan is denominated in USD. The $103 transaction loss recorded in the USD income statement is created by the BYR denominated net monetary asset which was BYR 530,000 at the beginning of the year and increased by BYR 766,880 during the year. The $103 transaction loss can be recomputed as follows. The income tax expense impact related to these foreign currency losses has been ignored in the USD financial statements.

(BYR 530,000/900) – (BYR 530,000/800) = ($74) (BYR 766,880/900) – (BYR 766,880/870) = ($29)

($103) Bela Inc balance sheet

Account

BYR balance at

12/31/X2 Exchange rate

USD balance at 12/31/X2

Cash BYR 474,800 USD 1 = BYR 900 USD 528

Accounts receivable BYR 1,000,000 USD 1 = BYR 900 USD 1,111

Inventory BYR 340,000 USD 1 = BYR 800 USD 425

Fixed assets BYR 900,000 USD 1 = BYR 800 USD 1,125

Total assets BYR 2,714,800 USD 3,189

Accounts payable BYR 100,000 USD 1 = BYR 900 USD 111

Accrued expenses BYR 77,920 USD 1 = BYR 900 USD 87

Loan from USA Corp BYR 900,000 USD 1 = BYR 900 USD 1,000

Account

BYR balance at

12/31/X2 Exchange rate

USD balance at 12/31/X2

Total liabilities BYR 1,077,920 USD 1,198

Common stock BYR 100,000 USD 1 = BYR 500 USD 200

APIC BYR 420,000 USD 1 = BYR 500 USD 840

Cumulative translation

adjustment (CTA) (USD 687)

Retained earnings BYR 1,116,880 USD 1,638

Total shareholder’s equity BYR 1,636,880 USD 1,991

Total liabilities and equity BYR 2,714,800 USD 3,189

Bela Inc income statement

Account BYR amount for

period Exchange rate USD amount for period

Revenue BYR 1,000,000 USD 1= BYR 870 USD 1,149 Cost of goods sold BYR 300,000 USD 1= BYR 800 USD 375 Expenses:

General and administrative BYR 3,000 USD 1= BYR 870 USD 3 Depreciation BYR 100,000 USD 1= BYR 800 USD 125 Interest BYR 52,200 USD 1= BYR 870 USD 60

Total expenses BYR 455,200 USD 563

Foreign currency

transaction gain or (loss) (BYR 100,000) (USD 103)

Income before taxes BYR 444,800 USD 483

Income taxes BYR 177,920 USD 1= BYR 870 USD 205

Net income BYR 266,880 USD 278