Foreign currency translation is the process of accurately accounting for foreign currency transactions on financial statements. This is the process of converting foreign currency transactions into the company’s reporting currency. There are three steps that apply to entities of all sizes:
- Determine the functional currency of the business. (This is the currency that most of the business’s transactions use.)
- Translate all foreign currency items into the functional currency.
- Record the gains and losses of the translation between currencies.
There are varying rules involved when translating the following items: assets and liabilities, income statement items, allocations, different balance sheet dates, profit eliminations, and cash flow statement items.
Considering the complexity, it may be best to consult with an accounting professional.