Functional currency, Foreign Currency,Local currency

- *Functional Currency*: The currency of the primary economic environment where the entity operates.

- *Local Currency*: The currency of the country where the entity is located.

- *Foreign Currency*: A currency other than the entity's functional currency.

- *Transaction Currency*: The currency in which a transaction is denominated.

Example:

- A US-based company has a subsidiary in India.

    - Functional Currency (Subsidiary): Indian Rupee (INR) - primary economic environment is India.

    - Local Currency (Subsidiary): Indian Rupee (INR) - subsidiary is located in India.

    - Transaction Currency: USD - if subsidiary buys goods from US in USD.

    - Foreign Currency (Subsidiary): USD - USD is foreign to subsidiary's INR functional currency.

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Q. Which one of the following would be excluded from Other Comprehensive Income reported for the current year?

a. Foreign currency translation adjustments.

b. Foreign currency remeasurement gains or losses.

c. Unrealized holding gains or losses on available-for-sale securities.

d. Additional pension liability in excess of unrecognized prior service cost

ANSWER B

Foreign currency remeasurement gains or losses are recorded directly in the income statement as part of net income in the period they occur. They are typically reported under "Other Income/Expense" or within operating income (e.g., as part of cost of goods sold or SG&A). These arise when converting foreign currency financial statements into the functional currency. 

Currency Translation..in OCI But currency remeasurement...in Income statement ,as conversion of foreign currency,on settlement of transaction 

Key Details on Accounting Location:

·         Income Statement Classification: Remeasurement gains/losses (arising when the local currency differs from the functional currency) are recognized in the net income section of the income statement, not in Other Comprehensive Income (OCI).

·         Operating vs. Non-Operating: They are often reported in non-operating income/expense, though they may be allocated to operating categories if deemed appropriate for representing financial performance.

·         Realized vs. Unrealized: Both realized (settled transactions) and unrealized (year-end balance sheet remeasurement) gains/losses are booked to the income statement.

·         Distinction from Translation: Unlike translation adjustments (which go to OCI), remeasurement adjustments always flow through the income statement. 

 

THREE TERMS: LOCAL CURRENCY, FOREIGN CURRENCY & FUNCTIONAL CURRENCY

EXAMPLE A LTD ‘S (INDIAN ORGANIZATION)HEAD OFFICE /PRINCIPLE OPERATION OF BUSINESS IS IN UAE (LOCAL CURRENCY DIRHAM), EXPORTED GOODS TO USA ( FOREIGN CURRENCY US DOLLOER) $100,000, & RECEIVED US DOLLOER & CONVERTED INTO INDIAN RS(FUNCTIONAL CURRENCY , SINCE A LTD TRANSACT SALES. PURCHASES , MAJOR BUSINESS OPERATION IN INDIAN RUPEES…SO INDIAN RS IS FUNCTIONAL CURRENCY,BCOZ A LTD CONVERTED(REMEASUREMENT)DOLLOER NOT IN LOCAL CURRENCY DIRHAM BUT IN INDIAN CURRENCY ( FUNCTIONAL CURRENCY).