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Johnathan
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Level 1
Asked: 2019-12-23T00:40:55+00:00 In:

How do currencies affect the financial statements?

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Currencies are playing a key role at both macro and micro levels. Presently, the US is balming most of its trading partners for currency manipulation. Mr Trump believes that other countries are ripping off the US industries by devaluing their currency.

Consequently, it becomes cheaper for the US to import from other countries, but difficult to sell to other countries.

How can currency fluctuations affect the companies balance sheets and financial statements?

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    1. Level 1

      Some key point when currencies impact financial statements.

      • A company has a ‘functional currency’. Generally the home currency, but sometimes $, € etc.
      • Assets and liabilities held in other currencies are translated at closing rates (i.e. the spot rate at the date of the balance sheet).
      • Transactions in the year are translated at average rates.
      • Translation differences are taken directly to reserves and do not affect profit.
      • Transaction and economic differences do affect profit.
      • Transaction differences can be quantified, while economic differences cannot.
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