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I'm reading Becker book - FAR2-52 (Chapter 2, page 52), and it says: "The assets or liabilities resulting from foreign currency transactions should be recorded in the U.S. company's books using the exchange rate in effect at the date of the transaction."
I would take that to mean...they should be valued at their respective HISTORICAL RATEs
However there is also a paragraph (paragraph D) and example suggesting that your assets/liabilities be valued MARKED TO MARKET (i.e. FAIR MARKET VALUE) = CURRENT EXCHANGE RATE
Can someone help me make sense of chapter 2, page 52, paragraph letter E please? Are assets valued marked to market...or at historic rates.
There are 3 types of foreign exchange we need to be concerned with.
1. Transactions in a foreign currency (example #1 below)
2. A foreign subsidiary with a different functional currency than the parent (example #2 below)
3. A company/subsidiary that keeps its local books in a different currency than its functional currency (example #3 below)
Example #1 - If you are a US company operating in US dollars, but you make a sale in Euros, you need to use the exchange rate in effect on the date of the sale to convert that Euro sale to USD. The transactional gains or losses from foreign currency are recognized in the income statement. This is different than what is commonly referred to as the historical rate, which is used when you are remeasuring non-monetary assets if your books are kept in a different functional currency (see example #3).
Example #2 - If you are a US company and you have a consolidated subsidiary that has the Euro as its functional currency, the US company TRANSLATES the subsidiary's financial statements to USD using the month-end rate for the balance sheet accounts and the weighted average rate for the income statement. The difference between these 2 rates is recognized in the FCTA account (in OCI).
Example #3 - You are a European company, but most of your transactions are in USD, so your functional currency is the USD. Despite this, you still keep your books in Euro...yes, companies do this. You cannot just translate from Euro to USD like in #2 above. Instead, you must separate your assets and liabilities into monetary and non-monetary. Monetary assets and liabilities (cash, A/R, A/P, etc.) are REMEASURED at the current month-end exchange rate. Non-monetary assets and liabilities (inventory, fixed assets, etc.) are REMEASURED at the historical rate in effect when we purchased those assets or incurred those liabilities. Note that COGS and depreciation are also recognized using this historical rate.
Hope that helps.