[southern star]

Can anyone give me some insight in why this is a transaction and not a translation?

Packet Corp. is in the process of preparing its financial statements for the year ended December 31, 20X1. How would a gain on remeasuring a foreign subsidiary’s financial statements from the local currency into the functional currency that occurred during 20X1 be classified in these financial statements?

[tuanxn]

Foreign Currency Remeasurements are treated like foreign currency transactions, i.e. the gain or loss when remeasuring from the local currency into the functional currency hits net income. An example is when a subsidiary keeps its books in pesos (local currency), but transacts in Euros (functional currency). It will have to remeasure the books from pesos to Euros.

In a Foreign Currency Translation, the functional currency is translated into the reporting currency and any gain or loss hits OCI. Continuing from the previous example, let's say the subsidiary consolidates with the parent and the parent reports in the US dollar. Upon consolidation, we will translate the subsidiary's financials from the Euro (functional currency) to the Dollar (reporting currency).

Remeasurement vs. Translation

[southern star]

Is the translation only used in consolidation? Or is translation used, at times, after consolidation when preparing FS's?

[tuanxn]

Perhaps I'm interpreting your question incorrectly, but the consolidation I'm referring to isn't the actual merger of the subsidiary and the parent (so that one company remains afterwards), but the GAAP requirement that requires parents to file consolidated financial statements with their 50% owned subsidiaries. Thus, the parent and subsidiaries are separate entities still, they just file one consolidated financial statement together. So everytime the parent prepares financial statements and consolidates the subsidiary's financial statements, the foreign currency translation will occur.

[southern star]

That is what I understood and the question seems to indicate that is exactly what is going on, however, the answer stated that the gain should be in net income not OCI.

[tuanxn]

lol the problem you originally referred to concerned remeasurement whose gain or loss will hit net income. Translations will hit OCI.

[Author]

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