The steps in this translation process are as follows: Determination of Functional Currency The financial results and financial position of a company should be measured using its functional currency, which is the currency that the company uses in the majority of its business transactions.
If a foreign business entity operates primarily within one country and is not dependent upon the parent company, its functional currency is the currency of the country in which its operations are located.
A key factor raising the stakes in foreign-currency reporting is the fact that U. companies are increasingly looking offshore for growth. And this volatility will likely continue, given recent headlines, such as the spike in the yen’s value following Japan’s devastating earthquake last March, the rise of China’s yuan to a new high versus the U. dollar last summer, and runaway inflation in developing countries such as Venezuela. This article examines three frequent mistakes that accountants make regarding the reporting of foreign currencies.
The functional currency in which a business reports its financial results should rarely change.What really has me curious is that as you state "the CTA amount is the balancing amount so you can consolidate and report the Mexican operations in US$" but as I think through the statement translation process the CTA by definition seems to be a one-sided balancing amount and therefore by deduction I think only an amount used for reporting purposes "a balancing amount to make the consolidation process work" and therefore it doesn't get recorded in any GL accounts. Hi Stephen - This is the same email I had sent you last night - posting it here as it might be helpful for the others in the group.The CTA is recorded in consolidated financial statements. The double entry is will be as follows: Assume you invested an amount of US0 million in the foreign (Mexican) operation - a separate legal entity.I recently started working for a company that has a Mexican Mequilladora operation and they have not been correctly implementing FAS 52 as it applies to financial statement translation, so when I translated the Mexican operation's financial statements from Pesos to Dollars and went to record the translation loss to equity, I realized I had a one-sided adjustment that was needed in order to bring the Mexican dollar statements back into balance, which I guess means that the foreign currency translation adjustment must only be cumulative translation adjustments for reporting purposes and that it doesn't get recorded in the accounts; or am I doing something wrong?Hi Stephen, The cumulative translation adjustment(CTA) for a foreign currency translation adjustmetn arises as the all of the monetary assets (cash, financial assets, etc.) are translated at the current rate, but the non-monetary assets are translated at the historical rate.