FESA CONSOL

FlexSystem

Operational Challenges with Foreign Currency Translation

Issues

This is to analyze the operational issues associated with the implementation of the current rate method. In general, there are two main classes of exchange rate used in the conversion of financial statements which are denominated in foreign currencies which are:

 Historical rate – exchange rate prevailing at the date of transaction

 Current rate – closing rates that are applied to all transactions

Most items appearing in financial statements are translated at current rate except for share capital, share premium, and retained earnings.

Since there may be a large number of transactions it may not be practical to translate these items at the actual prevailing exchange rate at the date of the transaction during the consolidation process and therefore typical methods of approximation are used:

 Simple average rate measured on daily basis

 Simple average rate measured on monthly basis

 Weight average rate measured on monthly basis

The methods of approximation adopted above will therefore result in different amounts of exchange reserve so there are two routes for the completion of the translation for share capital, share premium and retained earnings accounts and these are:

 Translate at the current rate initially, and preparation of adjustment vouchers for the calculation of exchange differences between current rate and historical for each class of asset and liability.

 Translate at historical rate and calculation of net effect on exchange reserve directly.

Although the end results of consolidated financial statements are identical for each of the above routes only the first route can generate the breakdown of individual voucher adjustments to explain the exchange reserve movement of the components.

  

Expectations

Most customers will not accept changes in accounting policies as result of the implementation of a new accounting system and there is no way to generate the same results for the financial statements when the new system does not allow them to apply the prevailing accounting policies.

  

Solutions

FESA Professional Accounting offers implementation options to fit a particular situation. In addition, the system allows users to define their method of approximation for the historical rate and for the different routes of translation for each of share capital, share premium, and retained earnings accounts.

  

Benefits

Consistency of accounting policies can be maintained upon implementation of the new system so implementation costs and uncertainty can be reduced effectively.