This method will result in a net exchange gain or loss, which should be recognized in the income statement for the current period.
To determine whether a specific foreign operations is integral or not with the operation of the parent company, the concept of functional currency may be used as guidance. Functional currency is defined as the primary currency of the foreign entity's operating environment, it could either be the parent's currency or a foreign currency. Foreign operations are considered as integral to the operations of the parent if its functional currency is the same with its parent's.
Below is a list of indicators in determining the functional currency of the foreign entity.
Indicator
Foreign Currency
Foreign Operations is Not Integral)
Parent's Currency
Foreign Operation is Integral)
Cash flow
Primarily in foreign currency and do not affect parent company's cash flows.
Directly impact parent company's cash flows on a current basis.
Sales price
Not affected on short-term basis by changes in exchange rate.
Affected on short-term basis by changes in exchange rate.
Sales market
Active local sales market.
Sales market mostly in parent's country or sales denominated in parent's currency.
Financing
Part 2
Long-term accounts receivable
Long-term accounts receivable is considered as a monetary asset, and as such is translated at the current exchange rate.
Deferred Income
Deferred or unearned income is a nonmonetary liability, as such, it is translated using its appropriate historical rate.
Inventory valued at cost
Inventory is a nonmonetary asset, as such, it is translated using its appropriate historical rate.
Long-term debt
Lont-term debt is considered as a monetary liability, and as such is translated at the current exchange rate.
References
Advance Accounting, a Procedural Approach, 6th Edition, Volume 2, Pedro P. Guerrero, BSC, CPA, 2001 Edition
CPA Reviewer, Practical Accounting 2, 2002 Edition, Antonio Jaramillo-Dayag
