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How to handle Foreign Currency Translation Reserve (FCTR) in HFM - PART I

One of the functionality which gives a tough time to many who work on consolidation and reporting, is calculation of Foreign Currency Translation Reserve or FCTR for short. It's important to understand what is FCTR, how it is calculated and the reporting requirement so it can be properly handled in HFM.

For better understanding and spending appropriate time on the topic I will break the topic in 2 parts.

  • In part I, I will cover the functional part of FCTR and try to give you a simplified version of the functionality of FCTR,

  • while in part II, I will cover how it can be handled in HFM.

(In the current discussion I will refer to IAS21/IFRS requirement. Most of the other accounting standards will have more of less similar requirement with or without some local flavor.)

What is FCTR and why it is required to be calculated?

When a company reports its results which:

  • which includes transactions in foreign currency (Foreign currency can be defined as a currency different than the reporting/presentation currency), also mentioned as FC in further sections.

  • or consolidates results of its branches/subsidiaries/associates or JV's which records transactions in currency different than the currency in which the reporting entity is reporting its transaction

then such transactions are required to be translated in the reporting currency.

These FC transactions might be carried out throughout the year and also there will be some FC balances which are carried forward from the previous years. So on the reporting date the question arises at what rate to convert the transactions/balances? 

As per IAS 21 a foreign currency transaction should be translated at the spot rate as on the date of the transaction. Further, as per subsequent period reporting translation requirement and sec 38, IAS 21 further states that:

  • Revenue and expenses accounts SHALL be translated at average rate.

  • All monetary items SHALL translated at EOM rates. Eg. Cash/Bank Bal, Receivables/ Payables etc.

  • All non-monetary items are translated at the rate prevailing on date of transaction. But for translating to presenting currency EOM rate SHALL be used. Eg Fixed assets, Long term borrowings etc.

The first 2 points are pretty straight forward as the translation/reporting rate and the transaction rate are more or less the same. (Any diversion from this is kept out of the discussion to avoid confusion.)

The issue is when some items are translated in reporting currency at the rate of exchange as on the date of transaction (also mentioned as historical rate) as this rate will be different then rate as on the reporting date (EOM rate). This difference needs to be identified and accounted through the Income statement/Equity.

This difference which arise due to different rates applied to a single transaction/item/account is nothing but Foreign Currency Translation reserve or FCTR. To put in most simple word possible, FCTR or foreign currency translation reserve is the difference between the translated values of any asset/liability at EOM rate and historical rate.

Example: Let us take an example to understand FCTR further.

  • You will observe that in block1 the asset has being purchased in 2 parts. 1000 INR in previous year and 500 INR in current period.

  • The total assets at the EOM rate is 29.56 AUD.

  • While if the same is valued as per the rate on date of purchase the value is 29.90 AUD.

  • The difference .34 AUD is the difference due to change in translation rate.

  • In the example the value of the asset has gone down as AUD has gone weak as compared to INR.

  • So the difference of .34 is FCTR and will be appear as liability in the balance sheet.

I hope I am able to simplify what is FCTR so I can use the above example in the next part to explain how to handle the same in HFM in the next part in my subsequent blog. Please do leave your comment and suggestion so I can incorporate it in the next part.

Until then keep consolidating J!!!!


Very Informative. Thanks :)

A very nice and informative blog on FCTR. Helpful to understand foreign currency translation.

Great post. Thanks for sharing a clear step by step process on getting in the nice.

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