If our foreign entities functional currency is local currency, we use the currency rate method to translate the foreign entities FS from LC to USD reporting currency. For BS we use EOM rate , do we use current month average rate or YTD average rate to translate the P&L revenue and expense accounts? For example , for my April GBP trial balance, do we use April average rate or YTD(Apr) average rate for the P&L accounts? The ASC830 does not give us clear guidance. Thank you for all the help!
How do we usually translate the foreign entity P&L accounts?
Answers
Based on general acceptable
ASC 830 clearly requires you to use the April average rate (NOT the YTD average rate) for April P&L activity. This should be added to the March activity at the March rate and the February activity at the February rate, etc. to achieve a weighted average rate for the year. Imagine if all of your revenue was recorded in January and your expenses were recorded throughout the year. The value of that January revenue would change every period to provide a YTD simple average value. This violates ASC830 requirement that the financials reflect an appropriately Weighted Average Rate. See the specific guidance below:
830-10-55-11 Average rates used shall be appropriately weighted by the volume of functional currency transactions occurring during the accounting period. For example, to translate revenue and expense accounts for an annual period, individual revenue and expense accounts for each quarter or month may be translated at that quarter's or that month's average rate. The translated amounts for each quarter or month should then be combined for the annual totals.
1
Agree and this is consistent with the guidance pre-codification (FAS 52 I believe if memory serves).
Thank you all for the help. My understanding is if the expenses are recurring for example benefit , payroll, T&E etc , we need to use the YTD average rate for the April P&L activity. Maybe I am wrong. Thanks!
Helen stated it well above, but to be sure, for the P&L each month of the year should have the average rate of that month applied to it. For example, for the month of January, the average rate for January should be used to translate the January P&L, and the average rate for the MONTH of February should be used to translate the February P&L, etc. The translated results of each month are accumulated (added up) to arrive at the total results for the year to date period, or for a quarter (or other interim period) of the year. That way you achieve having applied the average rate of whatever period you are presenting.
I concur with Mark and Helen that the P&L should be measured by using the average monthly rate with the Balance Sheet using the spot rate at the end of the reporting period.
Filed Under:
FP&A