Remeasurement vs. Translation

Attribute	Remeasurement	Translation
Definition	Adjusting financial statements from a foreign currency to the reporting currency based on changes in exchange rates.	Converting financial statements from one reporting currency to another reporting currency.
Purpose	To reflect changes in exchange rates and their impact on financial statements.	To present financial information in a different reporting currency for consolidation or reporting purposes.
Applicable to	Foreign subsidiaries or branches of a company.	Foreign operations or entities with transactions in a different reporting currency.
Frequency	Usually done at the end of each reporting period.	Can be done at any time when financial statements need to be presented in a different reporting currency.
Exchange Rate	Uses spot exchange rates at the balance sheet date.	Uses average exchange rates for the reporting period.
Impact on Income Statement	Only affects translation gains or losses in the income statement.	Affects both translation gains or losses and foreign exchange gains or losses in the income statement.
Impact on Equity	Adjusts retained earnings for translation gains or losses.	Adjusts retained earnings for translation gains or losses and foreign exchange gains or losses.

Introduction

When it comes to financial reporting, companies operating in multiple currencies face the challenge of converting their financial statements into a common currency. This process is necessary to ensure consistency and comparability across different markets. Two commonly used methods for currency conversion are remeasurement and translation. While both methods serve the purpose of converting financial statements, they differ in their application and the impact they have on the financial statements. In this article, we will explore the attributes of remeasurement and translation, highlighting their differences and similarities.

Remeasurement

Remeasurement is a method used to convert the financial statements of a foreign subsidiary from its functional currency to the reporting currency of the parent company. The functional currency is the currency of the primary economic environment in which the subsidiary operates. Remeasurement is typically used when the subsidiary's functional currency is different from the parent company's reporting currency.

One of the key attributes of remeasurement is that it affects the income statement accounts of the foreign subsidiary. This means that items such as sales, expenses, and gains or losses on foreign currency transactions are remeasured using the exchange rate at the transaction date. The resulting gains or losses are recognized in the income statement, which can impact the reported profitability of the subsidiary.

Remeasurement also affects the balance sheet accounts of the foreign subsidiary. Assets and liabilities denominated in the functional currency are remeasured using the exchange rate at the balance sheet date. The resulting adjustments are recorded in the equity section of the balance sheet, under the heading "Cumulative Translation Adjustment."

It is important to note that remeasurement is a dynamic process, as exchange rates fluctuate over time. Therefore, the financial statements of a foreign subsidiary remeasured at different points in time may yield different results.

In summary, remeasurement is used to convert the financial statements of a foreign subsidiary from its functional currency to the reporting currency of the parent company. It impacts the income statement and balance sheet accounts, and the resulting adjustments are recorded in the equity section of the balance sheet.

Translation

Translation, on the other hand, is a method used to convert the financial statements of a foreign subsidiary from its functional currency to the reporting currency of the parent company when the functional currency and the reporting currency are different. Unlike remeasurement, translation does not impact the income statement accounts of the foreign subsidiary.

One of the key attributes of translation is that it affects the balance sheet accounts of the foreign subsidiary. Assets and liabilities denominated in the functional currency are translated using the exchange rate at the balance sheet date. The resulting adjustments are recorded in the equity section of the balance sheet, under the heading "Cumulative Translation Adjustment."

Translation also impacts the income statement of the parent company. The equity section of the foreign subsidiary's financial statements is translated using the historical exchange rates, while the income statement accounts are translated using the average exchange rates for the reporting period. The resulting adjustments are recorded in the parent company's consolidated financial statements.

Unlike remeasurement, translation is a static process, as it uses historical and average exchange rates. This means that the financial statements of a foreign subsidiary translated at different points in time will yield the same results, assuming no changes in the exchange rates used.

In summary, translation is used to convert the financial statements of a foreign subsidiary from its functional currency to the reporting currency of the parent company. It impacts the balance sheet accounts of the foreign subsidiary and the income statement of the parent company. The resulting adjustments are recorded in the equity section of the consolidated financial statements.

Comparison

While remeasurement and translation serve the purpose of converting financial statements, they differ in their application and the impact they have on the financial statements. Here are some key points of comparison:

1. Impact on Income Statement

Remeasurement affects the income statement accounts of the foreign subsidiary, as gains or losses on foreign currency transactions are recognized. In contrast, translation does not impact the income statement accounts of the foreign subsidiary.

2. Impact on Balance Sheet

Both remeasurement and translation impact the balance sheet accounts of the foreign subsidiary. However, remeasurement adjusts the assets and liabilities using the exchange rate at the balance sheet date, while translation uses historical exchange rates.

3. Dynamic vs. Static Process

Remeasurement is a dynamic process, as it takes into account the fluctuating exchange rates over time. On the other hand, translation is a static process, as it uses historical and average exchange rates.

4. Impact on Consolidated Financial Statements

Remeasurement does not directly impact the consolidated financial statements of the parent company. However, the resulting adjustments recorded in the equity section of the foreign subsidiary's financial statements will impact the equity section of the consolidated financial statements. Translation, on the other hand, directly impacts the consolidated financial statements, as it adjusts the income statement accounts of the parent company.

5. Reporting Currency Alignment

Remeasurement is used when the functional currency of the foreign subsidiary is different from the reporting currency of the parent company. Translation, on the other hand, is used when the functional currency and the reporting currency are different.

Conclusion

Remeasurement and translation are two methods used to convert the financial statements of foreign subsidiaries into the reporting currency of the parent company. While both methods serve the purpose of currency conversion, they differ in their application and the impact they have on the financial statements. Remeasurement affects the income statement and balance sheet accounts of the foreign subsidiary, while translation primarily impacts the balance sheet accounts of the foreign subsidiary and the income statement of the parent company. Understanding the attributes of remeasurement and translation is crucial for companies operating in multiple currencies to ensure accurate and consistent financial reporting.