SIC-30, which stands for “Standing Interpretations Committee 30,” is an accounting standard issued by the International Accounting Standards Committee (IASC), which provides guidance on the translation of financial statements from the measurement currency to the presentation currency. The interpretation applies to entities that prepare financial statements in a currency other than their functional currency, which is the currency of the primary economic environment in which the entity operates. In this article, we will discuss the definitions, explanations, examples, and case studies related to the translation process from the measurement currency to the presentation currency, as provided by SIC-30.
Definitions:
Measurement Currency:
Measurement currency is the currency in which an entity measures its financial transactions and prepares its financial statements. It is usually the currency of the country in which the entity operates or the currency in which its books of account are maintained.
Presentation Currency:
Presentation currency is the currency in which an entity presents its financial statements. It is the currency in which the financial statements are prepared for external reporting purposes, such as for shareholders, investors, and other stakeholders.
Explanations:
SIC-30 provides guidance on how to translate financial statements from the measurement currency to the presentation currency. The translation process involves converting the financial statements from the measurement currency to the presentation currency using appropriate exchange rates. The objective of the translation process is to ensure that the financial statements are presented in a meaningful and understandable manner to users of the financial statements in the presentation currency.
SIC-30 provides the following key guidance for translating financial statements from the measurement currency to the presentation currency:
Functional Currency: SIC-30 emphasizes that the functional currency of an entity is the primary currency of the economic environment in which the entity operates, and it is used as the basis for preparing the financial statements. The functional currency is determined based on factors such as the currency in which the entity generates and expends cash, the currency in which prices for goods and services are denominated, and the currency in which the entity primarily borrows and lends funds.
Translation Method: SIC-30 allows for two methods of translation: the current rate method and the temporal method.
Current Rate Method: Under the current rate method, all assets and liabilities of the entity are translated at the exchange rate prevailing at the end of the reporting period, and all income and expenses are translated at the exchange rates prevailing at the dates of the transactions. The resulting translation differences are recognized in the equity section of the financial statements as a separate component of comprehensive income.
Temporal Method: Under the temporal method, monetary items, which are items that are either denominated in the measurement currency or are settled in the measurement currency, are translated at the closing rate at the end of the reporting period, while non-monetary items, which are items that are not denominated in the measurement currency and are not settled in the measurement currency, are translated at historical exchange rates. The resulting translation differences are recognized in the income statement.
Consistency: SIC-30 emphasizes the importance of consistency in the translation method used by an entity. Once a translation method is chosen, it should be applied consistently from period to period, unless there is a change in the functional currency or the nature of the entity’s operations.
Examples:
Example 1:
XYZ Ltd is a multinational company with its functional currency as USD. It prepares its financial statements in USD, which is its measurement currency. However, it also needs to prepare financial statements in EUR as its presentation currency for its European operations. At the end of the reporting period, the exchange rate between USD and EUR is 1 USD = 0.9 EUR.
Under the current rate method, XYZ Ltd will translate its assets and liabilities in EUR at the exchange rate of 0.9, which is the exchange rate prevailing at the end of the reporting period. For example, if XYZ Ltd has a cash balance of 1,000,000 USD in its financial statements prepared in USD, the translated amount in EUR would be 900,000 EUR (1,000,000 USD x 0.9).
Similarly, under the current rate method, XYZ Ltd will translate its income and expenses in EUR at the exchange rates prevailing at the dates of the transactions. For example, if XYZ Ltd has sales revenue of 2,500,000 USD during the reporting period, and the exchange rate at the date of the transaction was 0.92 USD = 1 EUR, the translated amount in EUR would be 2,717,391 EUR (2,500,000 USD / 0.92).
The resulting translation differences, if any, will be recognized in the equity section of the financial statements as a separate component of comprehensive income.
Example 2:
ABC Corp is a company with its functional currency as GBP. It prepares its financial statements in GBP, which is its measurement currency. However, it has operations in Japan and needs to prepare financial statements in JPY as its presentation currency. At the end of the reporting period, the exchange rate between GBP and JPY is 1 GBP = 150 JPY.
Under the temporal method, ABC Corp will translate its monetary items, which are denominated in the measurement currency GBP or settled in the measurement currency GBP, at the closing rate of 150 JPY, which is the exchange rate prevailing at the end of the reporting period. For example, if ABC Corp has a payable of 10,000 GBP in its financial statements prepared in GBP, the translated amount in JPY would be 1,500,000 JPY (10,000 GBP x 150).
Non-monetary items, which are not denominated in the measurement currency GBP and are not settled in the measurement currency GBP, will be translated at historical exchange rates. For example, if ABC Corp has a building with a historical cost of 1,500,000 GBP, and the historical exchange rate at the time of acquisition was 1 GBP = 140 JPY, the translated amount in JPY would be 210,000,000 JPY (1,500,000 GBP x 140).
The resulting translation differences, if any, will be recognized in the income statement.
Case Studies:
Case Study 1: Company A is a US-based company with its functional currency as USD. It prepares its financial statements in USD, which is its measurement currency. However, it has operations in Mexico and needs to prepare financial statements in MXN as its presentation currency. During the reporting period, the exchange rate between USD and MXN fluctuates significantly, resulting in translation differences.
In this case, Company A can choose to use either the current rate method or the temporal method for translating its financial statements from USD to MXN, depending on the nature of its operations and the accounting policies it adopts. It should ensure consistency in the translation method used from period to period.
Case Study 2:
Company B is a UK-based company with its functional currency as GBP. It prepares its financial statements in GBP, which is its measurement currency. However, it has operations in China and needs to prepare financial statements in CNY as its presentation currency. The exchange rate between GBP and CNY remains stable during the reporting period.
In this case, Company B can use either the current rate method or the temporal method for translating its financial statements from GBP to CNY. It should ensure consistency in the translation method used from period to period, and properly document its translation process and accounting policies for reference and audit purposes.
Conclusion:
SIC-30 provides guidance on the translation of financial statements from the measurement currency to the presentation currency, addressing the issues arising from reporting in a different currency than the functional currency. The standard outlines two main methods for translating financial statements: the current rate method and the temporal method, each with its own specific requirements and implications.
The current rate method is based on using the exchange rates prevailing at the end of the reporting period for translating monetary items, and the exchange rates at the dates of the transactions for translating income and expenses. This method is suitable for entities with highly volatile exchange rates or those with significant monetary assets and liabilities.
On the other hand, the temporal method is based on using historical exchange rates for translating non-monetary items, and the closing exchange rates for translating monetary items. This method is suitable for entities with relatively stable exchange rates or those with significant non-monetary assets and liabilities.
Companies need to carefully consider their specific circumstances, including the nature of their operations, the stability of exchange rates, and their accounting policies when choosing a translation method. Consistency in the translation method used from period to period is crucial to ensure comparability of financial statements over time.
In addition to the translation method, SIC-30 also requires companies to disclose information about the exchange rates used, the nature and amount of translation differences, and any hedging activities related to translation differences. Proper documentation of the translation process and accounting policies is essential for reference and audit purposes.
Overall, SIC-30 provides guidance on how to translate financial statements from the measurement currency to the presentation currency, taking into consideration the specific circumstances of each entity. Companies should carefully apply the appropriate translation method, ensure consistency in its application, and disclose relevant information in their financial statements to provide meaningful and transparent financial information to users.
In conclusion, SIC-30 provides comprehensive guidance on the translation of financial statements from the measurement currency to the presentation currency. It outlines two main methods, the current rate method and the temporal method, and requires companies to disclose relevant information about the translation process and any hedging activities. Companies should carefully consider their specific circumstances and consistently apply the appropriate translation method to ensure transparent and meaningful financial reporting. Proper documentation and disclosure of translation activities are essential for reference and audit purposes.