Codification And Foreign Currency Matters

Codification gives the definition of foreign currency as any other currency apart from the functional currency that is used in the reference distinct and the separable operation. In relation to the foreign currency there is also a reporting currency that is defined as the currency in which the reporting agency uses to prepare its financial statements. Both the reporting and foreign currency can be used by foreign entity in making financial reports. A foreign entity is defined as a distinct and a separable operation that uses other foreign currencies to make its financial reports.  The reports prepared by the foreign entity is normally consolidated or at times accounted for in the equity method. When making the financial reports, it is upon the reporting entity to make an identification of the foreign entities that it is dealing with so as to be able to determine the exact financial statements that need to be translated. However, there are certain times when the separable operations can decide to prepare their financial statements using the reporting currency. It is worth noting that the reporting currency is limited to preparing financial statements for the domestic entities whose statements may not need to be translated.

Codification requires that if the reporting currency that is used is not functional then all the items that are used and reported in its financial statements should be translated to the reporting currency. There are certain scenarios when the accounting transactions can be recorded in a local currency whose functionality does not exist. If the local currency is not functional then there has to be a re-measure of the accounting records from the local currency used to the functional currency. Once the re-measure step has been completed, the functional currency is then translated to the reporting currency. The re-measurement process is important because it makes the accounting records to get back to normal. Moreover, the records will equal the values in the accounting records that were used with the functional currency.

The re-measurement process uses an exchange rate for the non-monetary accounts where the rates that lie between the local currency and the functional currency are used.  In the case of the revenues that are generated from the non-monetary accounts, the rates that lie between the local and functional currency are used. For the case of the monetary accounts, the current rates that lie between the local and functional currencies are also used. In both type of transactions, there will always be either a currency transaction gain or a currency transaction loss. The gain or loss of the currency is always recognized in both type of transactions. The transaction gains or losses made on the foreign currency are normally recognized in income but at times the recognition is done with some exceptions.

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