Key Difference – Translation vs Remeasurement
Translation and remesurement are two common aspects associated with using foreign currency. Both are based on the principles of exchange rates (the rate at which a currency will be converted to another). However, here is a subtle difference between the two conversion methods. The key difference between translation and remeasurement is that translation is used to express financial results of a business unit in the parent company’s functional currency whereas remeasurement is a process to measure financial results that are denominated or stated in another currency into the functional currency of the organization.
CONTENTS
1. Overview and Key Difference
2. What is Translation
3. What is Remeasurement
4. Side by Side Comparison – Translation vs Remeasurement
5. Summary
What is Translation?
Translation is used to express financial results of a business unit in the parent company’s functional currency. Translation is a common practice conducted in companies that have operations in more than one country. This will be conducted using an exchange rate. Translation method is also referred to as ‘current rate method.’ Terminologies of the following types of currencies should be understood in currency translation.
Functional Currency
Functional Currency is the currency in which the company conducts business transactions. According to IAS 21, the functional currency is the “currency of the primary economic environment in which the entity operates.”
Local Currency
Local currency is the currency that is used to conduct transactions in a particular country or geographical area.
Foreign Currency
Foreign currency can be termed as any currency except the local currency.
Reporting Currency
Reporting currency is the currency in which financial statements are presented. Thus, it is also known as the ‘presentation currency.’ This may be different to the functional currency for some companies. If results are reported in each country in different currencies, it becomes difficult to compare results and calculate results for the entire company. For this reason, all operations in every country will be converted into a common currency and reported in financial statements. This common currency is usually the currency in the country where the corporate headquarters is based.
There is an exchange rate risk that the company is exposed to where the reported results may be higher or lower compared to the actual result based on the changes in the exchange rate. This is referred to as the ‘translation risk.’
What is Remesurement?
Remeasurement is a process to measure financial results that are denominated or stated in another currency into the functional currency of the organization. This method is also referred to as ‘temporal method.’ Remeasurement has to be conducted in the following circumstances.
- When the local currency and functional currency is not equal
If a company maintains accounting records in the local currency, but its functional currency is another, then the results should be converted into the functional currency.
E.g. Company B is located in Malaysia and maintains accounting records in Malaysian Ringgit (MYR). The company’s functional currency is US Dollar (USD). Therefore, the MYR should be remeasured in USD
- If the company has account balances that are not denominated in the company’s functional currency.
E.g. Company H operates with the functional currency of US Dollar (USD). Recently the company obtained a foreign loan denominated in Great Britain Pound (GBP). The loan payments should be converted into USD for reporting purpose
According to the above, transactions may be recorded in local currency or foreign currency where both should be converted into functional currency. Following remesurement, the results will be translated into the reporting currency.
Figure 1: The relationship between local/foreign currency, functional currency and reporting currency
What is the difference between Translation and Remeasurement?
Translation vs Remeasurement |
|
| Translation is used to express financial results of a business unit in the parent company’s functional currency. | Remeasurement is a process to measure financial results that are denominated or stated in another currency into the functional currency of the organization. |
| Synonyms | |
| Translation is also known as the current rate method. | Remeasurement is also known as the temporal method. |
| Types | |
| Translation is conducted when the functional currency is different from the reporting currency. | Remeasurement is used to convert either local currency or foreign currency (or both) into functional currency. |
Summary – Translation vs Remeasurement
The difference between translation and remeasurement can be explained in relation to the functional currency and reporting currency. When the functional currency is converted into reporting currency, it is named as a translation. At times where certain transactions are reported in either local currency or a foreign currency, they should be converted into functional currency prior to converting into reporting currency. Exchange rates are subjected to fluctuations constantly since the demand and supply for currencies alter where appreciation of a currency demonstrates a boost in the result and vice versa.
Reference:
1.ArzionaKel. “Translation vs Remeasurement of Foreign Financial…” Translation vs Remeasurement of Foreign Financial Statements – Translation vs Remeasurement of Foreign. N.p., n.d. Web. 08 May 2017. <https://www.coursehero.com/file/8541281/Translation-vs-Remeasurement-of-Foreign-Financial-Statements/>.
2.Financial reporting developments A comprehensive guide Foreign currency matters. Tech. N.p.: Ernst & Young, 2016. Print.
3.ArzionaKel. “Translation vs Remeasurement of Foreign Financial…” Translation vs Remeasurement of Foreign Financial Statements – Translation vs Remeasurement of Foreign. N.p., n.d. Web. 08 May 2017. <https://www.coursehero.com/file/8541281/Translation-vs-Remeasurement-of-Foreign-Financial-Statements/>.