Blackwell Reference Online

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Foreign currency accounting issues affect the financial reporting for companies that operate in foreign countries. Transaction gains and losses occur when a transaction is denominated in a currency other than the functional currency of the business entity. As an example, a US company may purchase merchandise from a Swiss company and incur a payable or liability denominated in Swiss francs. Transaction gains and losses occur due to changes in exchange rates between the time the transaction occurs and the time payment is made. These transaction gains and losses are usually included in the income of the US company because they represent a real economic gain or loss. Exceptions include (1) foreign currency transactions intended to hedge specific purchase commitments, and (2) transactions that are part of a long‐term investment in a foreign country. In the USA, accounting for foreign currency transactions and translation of foreign denominated financial statements is covered in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 52 (1981) (SFAS 52). Internationally, accounting practices vary across countries. International Accounting Standards Board Standard 21 (IAS 21), “The effect of changes in foreign exchange rates,” became effective for financial statements issued after January 1995 for countries that comply with the International Accounting ... log in or subscribe to read full text