CFM8002 - Accounting for foreign exchange: accounting standards and translation

The need for a standard

The question of whether items should be translated at the balance sheet date at the closing rate, or carried at the historical rate, doesn’t just apply to trade debts. The same question arises on any asset or liability denominated in a foreign currency – for example, fixed assets, short or long- term borrowings or investments of various kinds.

A company could:

• translate all its assets and liabilities at the closing rate
• or adopt what is called the temporal method
• or translate current assets and liabilities at the closing rate, and long-term assets and liabilities at the historical rate
• or translate monetary assets and liabilities at the closing rate, and non-monetary items at the historical rate.

Before 1983, different companies used all four of the above methods of foreign currency translation. But in order for shareholders and other users of accounts to be able to compare the performance of one company with another, it is desirable for companies to adopt a common standard. This was provided in April 1983 when, after a long gestation, SSAP20 was published.

SSAP20 does not apply to small companies that use the Financial Reporting Standard for Smaller Entities (FRSSE). The FRSSE, however, sets out a treatment for foreign currency items that is essentially identical to SSAP20.