Foreign Currency Translation and Transactions

Foreign Currency Translation and Transactions - Foreign...

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Foreign Currency Translation and Transactions The foreign branches and subsidiaries of U. S. corporations often conduct business and maintain their accounting records in the currency of the country they reside in known as the host country. This creates a major problem of currency translations for the domestic parent corporation that must restated into U. S. dollars the results received from its foreign operation. Other tax features that require translation are taxable income or loss of a foreign branch, earnings from a foreign branch, actual and estimated distributions from a foreign corporation, and foreign income taxes. Translational exchange gains and losses arise when a foreign branch or subsidiary that has a functional currency other than the U. S. dollar restores earnings that were previously taxed to the U. S. parent and the exchange rate has changed. Transactions that occur when a U. S. corporation has earmarked a foreign currency and the exchange rate fluctuates between the time the transaction has been entered into the books and the time the books close are knows as transactional. The nature and objective of foreign currency translation is to provide a standard of value, a medium of exchange, and a unit of measure. Currencies of different nations perform the first two functions with varying degrees of efficiency but essentially all currencies provide a unit of measure. To measure a transaction in their own currencies, businesses around the globe rely on exchange rates negotiated on a continuous basis in foreign currency markets. The exchange rates that are used in accounting for foreign operations and transactions (other than forward contracts) are spot rates, current exchange rates, historical exchange rates, and average rates. They are defined as follows: spot rate–the exchange rate for immediate delivery of currencies exchanged current rate–the rate at which one unit of currency can be exchanged for another currency at the balance sheet date or the transaction date historical rate–the rate in effect at the date a specific transaction or event occurred
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average rate–a simple or weighted average of either current or historical exchange rates Use of historical exchange rates shields financial statements from foreign currency translation gains or losses. The use of current rates causes translation gains or losses. (Ruby, 1-2) According to Title 26 of the Internal Revenue code Section 989, qualified business units (QBU) are any separate and clearly identified unit of a trade or business of a taxpayer provided that separate books and records are maintained. The applications for use of QBUs are corporations, partnerships trusts or estates. The activities of a corporation, partnership, trust, estate, or individual qualify as a QBU if
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This note was uploaded on 10/22/2011 for the course ACCOUNTING ACC565 taught by Professor Lindachess during the Spring '10 term at Strayer.

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Foreign Currency Translation and Transactions - Foreign...

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