Gains and losses on those foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity.
Intercompany transactions of a long-term investment nature are considered part of a parent's net investment and hence do not give rise to gains or losses.
More specifically, this Statement replaces FASB Statement No.
8, Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements, and revises the existing accounting and reporting requirements for translation of foreign currency transactions and foreign currency financial statements.
It presents standards for foreign currency translation that are designed to (1) provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity and (2) reflect in consolidated statements the financial results and relationships as measured in the primary currency in which each entity conducts its business (referred to as its "functional currency").
An entity's functional currency is the currency of the primary economic environment in which that entity operates.
However, it can be earlier or later than the closing date, too.
If you need to deal with the consolidation, then you need to apply both standards, not just one or the other.
An entity can be any form of operation, including a subsidiary, division, branch, or joint venture.
The Statement provides guidance for this key determination in which management's judgment is essential in assessing the facts.
Accordingly, the exchange gains and losses in such an operation are included in net income.
Contracts, transactions, or balances that are, in fact, effective hedges of foreign exchange risk will be accounted for as hedges without regard to their form.