As mentioned above, currency translations help a company create financial statements that feature a single currency. In fact, companies are often required by the governing tax authority to only use one denominated currency as part of their recording procedure.
While currency translation is typically mandatory process, there are certain benefits to currency translation as well. In the modern world, the multinational company is becoming the norm and even small- and medium-sized businesses tend to have cross-border operations. For these companies, currency translation will be essential.
Using a single currency as part of financial statements will make these statements much easier to read and analyse. It is near impossible to draw sensical
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Currency translation often only occurs at the end of the financial year, but the rates you choose to use are determined by the transaction date in some instances.
The following section will deal more on how the actual rates are determined in terms of calculating the currency translation. For now, it is important to note that you might need to use the exchange rates from the past as well as present. Therefore, proper bank statements and income records are essential to ensure you use the right rate.
Recording the gains and losses on the currency translation
Finally, currency translation often results in translation adjustments. These adjustments must be recorded on the company’s balance sheet as well. They are mention in the equity section of the balance sheet.
Furthermore, the translation adjustment also requires the company to record the adjustment in the profit or loss statement of comprehensive income.
How are the rates
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This is typically the financial year, as it is the basis for most financial statements.
The average rate must be calculated by checking each rate for the period and dividing it by the number of different rates.
The average rate for the period is used for translation currencies for income statement accounts.
• The ending rate for the period – The ending rate for the period is the exchange rate at the of the financial period. For example, if the financial year ends on December 31, the currency translation would use the exchange rate of this date.
Liability and asset accounts use the ending rate for the period for currency translation. Nonetheless, fixed assets are not translated with the ending rate.
• The original historical rate at the point of acquiring – The original historical rate at the point of acquiring simply uses the exchange rate of the date when the entry was created for the income statements. For example, if the qualifying transaction happened on July 4, even if the financial year ends on December 31, the exchange rate used should be from July
Saputo’s business is constantly affected by changes in the exchange rate as the majority of its business takes place outside of Canada. Due to the fact products and cash flows travel internationally, the company is exposed to economic exposures. Exchange exposure affects Saputo in many ways such as the cost of production and demand for their products. Transaction exposure affects Saputo when cash flows from foreign operations into Canada. Saputo is affected by translation exposure when foreign revenue is converted into Canadian dollars for its financial statements.
...l language is also beneficial for comparison of statement, understanding, and saving cost for international companies.
In this case we are considering the time value of money in terms of growth where industry standards typically expect rates to be stated in annual terms.
Therefore, the total investment for compounded continuously rather than compounded quarterly would be recorded as
...y Fixed Exchange Rates: Recent Experiences." Introduction to International Economics. New York: Palgrave Macmillan, 2011. 368. Print.
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