Translation and remeasurement are the concepts that relate to foreign currency and exchange rates. In both, the financial results of a company are converted to another currency. Often people use the two concepts interchangeably, but there is a noteworthy difference between the two. Thus, to understand the two and their usage, we need to know the differences between Translation vs Remeasurement.
The primary difference between the two is that we use translation to convert the financial numbers of a subsidiary into the functional currency of a parent company. Remeasurement, on the other hand, is a process of calculating the financial numbers in another currency in the functional currency of a company.
Before we move ahead, we need to know what is functional currency and other similar types of currencies.
It is the currency in which a firm carries its transactions. As per IAS 21, it is the “currency of the primary economic environment in which the entity operates.”
It is the currency a company uses to carry out its business in a specific country.
It is all other currencies apart from the local currency.
It is the currency in which a company arranges its financial statements (FS). We can also call this currency as the ‘presentation currency.’ This currency may or may not be the same as the functional currency.
For a multinational company, if it calculates the results in the local currency in which it operates, it becomes very challenging to know the accurate result overall. Thus, it becomes important to convert the results of foreign operations into one common currency. Generally, this common currency is of the country where the company has its headquarters.
What is Translation?
As said above, translation is the process of converting a subsidiary’s numbers into the functional currency of the parent firm. A firm that functions in one or more countries often uses such a concept. Another name for this translation method is the ‘current rate method.’
What is Remeasurement?
Remeasurement, on the other hand, is a process of converting the financial result in another currency into the functional currency of a company. We also call this process a ‘temporal method.’ A company goes for remeasurement in the following scenarios:
- If the local and functional currency is different
This means if a company maintains accounts in the local currency, then it needs to switch the numbers in the functional currency. For instance, Company A is based in India and maintains accounts in Indian Rupees. However, its functional currency is USD. In this case, Company A will have to remeasure the accounts from Indian Rupee to USD.
- If the account balances of a company are not in its functional currency.
For example, the functional currency of Company B is USD. However, it recently got a foreign currency loan in Indian Rupees. Now, for accounting purposes, Company B needs to convert the Indian Rupee loan to USD.
Translation vs Remeasurement – Differences
Now that you know what Translation and Remeasurement mean, let’s take a look at the differences between them:
Translation is a process of converting the financial numbers of a subsidiary into the functional currency of the parent company.
Remeasurement, on the other hand, is the process of converting financial results in another currency into the company’s functional currency.
A company usually goes for translation if its functional and reporting currencies are not the same. Or when the local currency is equal to the functional currency.
Remeasurement, on the other hand, comes into play when converting local or foreign currency or both into functional currency.
Another name for translation is the current rate method, while for measurement, it is the temporal method.
What rate is used?
In translation, a company will use the current rate to convert account balances. Since they occur throughout a year, revenue and expenses are converted using the average method.
In remeasurement, the company converts non-monetary items at historical rates. Same as translation, the average rate is used to convert revenue and expenses.
Gain or Loss
Any translation adjustment or gain/loss becomes part of the comprehensive income. Under remeasurement, any imbalance is taken care of at the time of calculating net income.