Introduction to Foreign Currency Transactions & Translation
Why Foreign Currency Accounting Matters
Companies that operate internationally frequently buy, sell, borrow, lend, or invest using currencies other than their reporting currency. U.S. GAAP provides guidance for recording foreign currency transactions and translating the financial statements of foreign operations. These concepts are commonly tested on the CPA (USA) FAR exam.
- Foreign currency transactions involve individual transactions denominated in another currency.
- Foreign currency translation converts an entire foreign entity's financial statements into the reporting currency.
- Exchange rate changes create gains, losses, or translation adjustments.
Note
Foreign currency transactions and foreign currency translation are separate accounting topics with different reporting requirements.
Summary
Understanding the distinction between transactions and translation is the foundation of foreign currency accounting.