Translation of financial statements
Financial statement translation is the process by which a company restates all assets, liabilities, revenues, expenses, profits, and losses that are denominated in foreign currencies—in the currency in which a company presents its financial statements. Accounting for FX gains and losses comes as a result of this financial statement translating procedure. A financial statement includes:
- A letter from the Chairman of the Board to introduce the statement.
- An annual activity statement, which reviews the year’s significant events, prospects, risk factors, and future objectives.
- The annual accounts include the balance sheet, profit and loss account, notes to the accounts, and sometimes the company accounts, audit statements, etc.
- This document is mandatory in some countries for commercial companies. The financial statement enables stakeholders, amongst other things, to see a company’s financial state.
Methods of financial statement translation
There are three major approaches for financial statement translation:
1. Current/noncurrent method
In this type of method, all the foreign exchange-denominated current assets and liabilities are translated at the current exchange rate, while non-current assets and liabilities are translated at the historical exchange rate.
2. Monetary and nonmonetary approaches
While nonmonetary items (inventory, fixed assets) are translated using the historical exchange rate, monetary items (such as cash accounts receivable and payable) are translated using the current exchange rate.
3. Using the current rate
The current exchange rate is used to translate every line item on the balance sheets and income statements. Regardless of the financial statement approach employed, the resulting FX gains and losses simply appear on paper and infrequently have an impact on cash flows.
Why are your financial statements being translated?
You will use different currencies in your business activities if your business organization operates in other nations. However, your financial statements must be documented in a single currency for accounting purposes. For this reason, you must execute currency translation.
Important financial statements documents you must know
Every organization requires many essential financial statement documents. Not only are compliance and best practices important, but they are also essential instruments for managing your financial situation. The main documents you should be aware of are listed below:
1. Revenue statement
This is possibly the most significant financial document you must know. An income statement’s primary purpose is to assist a company in keeping a close eye on revenue. An income statement, commonly referred to as a profit and loss statement, displays your company’s revenue and expenses during a specific period. The income statement accounts for revenue, losses, and expenses to determine your company’s revenue gain or loss. Therefore, it is without a doubt the most significant type of financial statement because it enables you to determine whether or not your firm is in good condition.
2. Cash flow statement
The cash flow statement shows how money enters and exits your business, enabling you to see how much working capital you have at any given time. A cash flow statement is essential for determining how quickly you could obtain cash if you needed it, as it excludes things like raw materials and purchases made, but not yet paid, on credit.
3. Balance sheet
The balance sheet displays three key things: your assets, your liabilities, and your equity. The balance sheet can show a company’s current value for the timespan it covers. Examining your balance sheet can assist you in deciding whether you can meet your financial obligations or not.
4. Financial statements note
Because of IFRS (International Financial Reporting Standards) requirements, the information in your other financial statement documents now has more context. For example, even if your assets are shown on the balance sheet, you will detail them in your note to financial statements document. You must use the information in this paper to ensure that all rules and laws are followed.
5. Statement of equity changes
This report details the adjustments made to the share capital, retained earnings, and your business’s accumulated reserves. It displays changes to the owner’s equity for sole proprietorship. It displays the changes in the equity of both partners in a partnership. The statement of change in equity for a corporation illustrates how equity shares have changed among all shareholders.
Financial statement hierarchy
The following is the standard order for financial statements:
- Income declaration
- The flow of funds statement
- Statement of equity changes
- Balance sheets
Top 10 most popular financial statement users
Different types of people and corporations use the financial statements that companies have created in ways that are appropriate for them. The following is a list of who typically uses financial statements:
- Business administrators
- State and government institutions
- Financial analysts
- Financial institutions
- Rating agency
1. Business administrators
The company’s management is the primary user of these financial statements. Even though they are the ones who create the financial accounts, the board and management must consult them when assessing the business’s development and expansion. The financial statement is examined by the company’s management in light of the following factors: liquidity, profitability, cash flows, assets and liabilities, cash balances, fund requirements, debt that has to be paid, project finance, and many other ongoing operational tasks. Simply stated, financial statements are necessary for management to make corporate choices.
The company’s owners are its investors. They are interested in comprehending and staying current on the business’s financial performance. They want to determine, depending on the financial statement, if they should remain invested or leave the company based on its performance.
Clients should check out the business’s financial statements they are buying goods or services from. In addition, large clients want to engage with financially secure businesses since they want to establish a long-term partnership or contract with them. Additionally, a financially sound business can offer credit to its clients and deliver goods and services at a lower cost than the competition.
Competitors are curious about the company’s financial situation. They also want to keep a competitive edge over their rivals; therefore, they want to know how well-off the rival business is. Furthermore, by examining the assertions, people could alter their course of action.
5. State and government institutions
The firm’s financial statements will be examined by government organizations like the income tax department and the sales tax department to see whether the company paid the proper taxes. Additionally, they would like to forecast future taxes based on business success and industry norms.
Different perspectives are taken by employees when examining the company’s financial statement. Since their bonus and advancements are based on the company’s financial performance, they want to know how the business is performing. Additionally, they would seek to have a thorough understanding of the company and of market health, which would be shown by the financial statements. The business would like its employees to be aware of and understand its financials since it may decide to involve them in decision-making.
7. Financial analysts
Investment analysts closely monitor the company’s financial accounts. This is because they are knowledgeable about the industry and up to speed on the state of the business. Using their evaluation of the financial accounts as a basis, the Investment analysts choose whether or not to advise their customers to purchase company stock.
8. Financial institutions
Financial institutions such as conventional banks, financial institutions, and creditors want to make sure the business can afford the debt. They, therefore, review the business’s financial statements to determine whether or not to offer a loan.
9. Rating agency
To assign a credit rating to the company’s debt instruments, a credit rating agency examines the organization’s financial statements. To receive a rating on the securities it is issuing to raise money, the issuing business must give the credit rating agency all the information it has. Once a rating agency has established a rating based on the company’s financials, the investors in these securities can make an educated decision.
Customers and suppliers alike prefer doing business with financially stable organizations. As a result, they use financial documents and decide whether to provide the company with credit. In conclusion, financial statement translation is very important because it helps keep a track record of company expenditures and income to know whether the firm’s financial status is at profit or loss.