FCTR in practice

Headnote

A practical guide to foreign currency translation reserve calculations.

How often have you mentioned foreign currency translation reserve (FCTR) to someone and one of two things happen: either their eyes glaze over or panic sets in and their eyes immediately start scouting the room for the nearest exit?

I recently experienced the latter and once in the clear decided that I would do what any person in my situation would do - I googled FCTR and all known related words and variations, only to find a void in the practical application of FCTR. Then and there I made it my mission to fill that void - to go where no one else dared to go - the practical world of FCTR.

The theory behind FCTR, namely AASB 121 , is the starting point - you need to understand AASB 121 before you get to the unwritten pages of FCTR: the practical approach.

THE THEORY BEHIND FCTR

The objective of AASB 121 is to prescribe how to account for foreign currency transactions and foreign operations in the financial statements of the reporting entity.

Paragraph 8 of AASB 121 defines a foreign operation as "an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity."

A common misconception is that a foreign operation is defined by geographical location only. However, the standard clearly allows for a local entity that operates in a currency different to that of the reporting entity to fall within the ambit of the foreign operation definition.

Paragraph 2 of AASB 121, describes the first principal issue as which exchange rates to use. Actual exchange rates are readily available from various online sources however the point to consider is the date of the exchange rates you use to translate the foreign currency transactions and foreign operations.

AASB 121 prescribes the use of the following exchange rates:

* spot rate at the date the transaction takes place

* closing rate at balance sheet date

* average rate - typically covering the reporting period.

It is important to note that the use of the average rate is restricted and can...