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Foreign Currency Translation: International Accounting Basics

subsidiary would remeasure assets and liabilities into U.S. dollars as
of Nov. 30, 2009, and those amounts would become the accounting basis
of assets and liabilities for the Venezuelan subsidiary. Going
forward, the subsidiary should measure monetary assets and liabilities
at current (that is, balance sheet) exchange rates and recognize a
gain or loss on that translation in net income. This diverges
significantly from the rules prior to the application of highly
inflationary accounting where such gains and losses would be
recognized only in OCI. The issue is that many preparers present the statement of cash flows
under the indirect method. When preparing the statement of cash flows
for a consolidated company that deals in more than one functional
currency, it is simple to prepare a statement of cash flows based on
the consolidated balance sheets of the current and prior
periods—simple, but not correct. The consolidated balance sheets have
been prepared using the exchange rates in effect on each balance sheet
date; cash flows, however, should be translated into the reporting
currency using the average exchange rate in effect during the

Three Common Currency

You can choose the currency of the country where your main headquarters are located or where your major operations are. The Delors Report proposed a three-stage preparatory period for economic and monetary union and the euro area, spanning the period 1990 to 1999. Foreign currency is playing a bigger role in financial reporting
U.S. companies increasingly Three Common Currency look to foreign markets for growth. GAAP uses “reporting currency.” However, other
than the differences noted above, the two bases of accounting are
equal, and accordingly, the mistakes described here could occur
whether a company applies IFRS or U.S. Upon selecting a functional currency, IFRS identifies primary and
secondary factors to consider.


Cross currency triangulation is the process where one currency is converted to another via a third common currency. The major significance of cross-currency triangulations—in which foreign money exchanges do not involve the U.S. dollar—results from the fact that many currencies are not typically traded against each other in the interbank market. At least half the countries of the world fall in between the two poles. But in most cases, their intermediate exchange rate regimes don’t obey such well-defined rules as Williamson’s BBC plans. Many of the larger Emerging Market countries – including Korea, India, and China – follow ‘systematic managed floats’ (Frankel, 2019). The central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remainder to be absorbed as a change in foreign exchange reserves.

Three Common Currency

This mistake can arise when a company has an intercompany account
(for example, a parent’s intercompany receivable from a subsidiary)
recorded on the books of companies with different functional
currencies. The issue boils down to how to account for an intercompany
balance when each of the parties has the balance recorded in different
currencies (for example, the parent company records the balance in
U.S. dollars, while the subsidiary records the balance in euros). Many opportunities exist for the arbitrage and triangular traders, that don't always include exchange rate arbitrages. Traders may want to capitalize on merger and acquisition opportunities through the currency markets, swap trades, forward trades, yield curve trades, and options trades.

Boundless Economics

According to the FASB ASC Topic 830, Foreign Currency Matters, all income transactions must be translated at the rate that existed when the transaction occurred. Foreign currency translation is the accounting method in which an international business translates the results of its foreign subsidiaries into domestic currency terms so that they can be recorded in the books of account. In most instances, triangulation involves profiting from exchange rate disparities. For example, suppose you institute two buys on a certain pair and one sell, or you sell two pairs and buy one pair. Any number of triangulation opportunities exist every day from banks in Tokyo, London, New York, Singapore, Australia, and all the places in between.

  • U.S. exports are growing at a healthy pace, as a slumping dollar makes
    goods from the U.S. less expensive overseas.
  • Many opportunities exist for the arbitrage and triangular traders, that don't always include exchange rate arbitrages.
  • Suppose that we have a three-pair triangulation opportunity such as GBP/CHF, EUR/GBP, and EUR/CHF, in which GBP/CHF is quoted from EUR/GBP and EUR/CHF.
  • Fortunately, computers linked directly to the interbank market can easily meet this challenge and profit through bid-ask spreads around the world from banks that make markets in currencies.

This column reviews the work of all three, tracing their ideas and drawing lessons for policymakers today. This can be difficult to determine when you conduct an equal amount of business in multiple countries. However, once you choose the functional currency, changes to it should be made only when there is a significant change in circumstances and economic facts. The functional currency is the one which the company uses for the majority of its transactions.

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