ASC 987: Foreign Currency Remeasurement Transactions & Journal Entries

Posted In | ASC Education | Gridlex Academy

Accounting Standards Codification (ASC) Topic 987, Foreign Currency Transactions, provides guidance on the accounting treatment for foreign currency transactions under Generally Accepted Accounting Principles (GAAP). One key aspect of foreign currency transactions is the remeasurement of monetary items, which involves adjusting the value of monetary assets and liabilities denominated in a foreign currency to reflect changes in exchange rates. This article will explore the key aspects of remeasurement of monetary items under ASC 987 and provide examples of journal entries to help you better understand the accounting treatment.
 

ASC 987 Overview

ASC 987 applies to entities that engage in foreign currency transactions, which may include buying or selling goods and services, borrowing or lending funds, and acquiring or disposing of assets denominated in a foreign currency. The standard provides guidance on the recognition, measurement, and presentation of foreign currency transactions in an entity's financial statements.

 

Remeasurement of Monetary Items

Under ASC 987, monetary items denominated in a foreign currency should be remeasured into the entity's functional currency using the current exchange rate at the balance sheet date. This remeasurement process involves adjusting the value of monetary assets and liabilities to reflect changes in exchange rates, which may result in foreign currency transaction gains or losses.

 

Journal Entries for Remeasurement of Monetary Items

To illustrate the accounting treatment for remeasurement of monetary items, let's consider an example. Company A, which has a functional currency of US dollars (USD), has an accounts receivable balance of €100,000 from a European customer. The exchange rate at the beginning of the year is €1 = $1.10, and the exchange rate at the end of the year is €1 = $1.20.

 

Here are the journal entries for Company A to record the remeasurement of the accounts receivable balance
 

1. Record the initial accounts receivable balance:

Debit: Accounts Receivable (in USD) $110,000
Credit: Sales Revenue $110,000
Calculation: €100,000 * $1.10 = $110,000

In this case, Company A records the accounts receivable balance in its functional currency (USD) using the exchange rate at the beginning of the year.

 

2. Record the remeasurement of the accounts receivable balance at the end of the year:

Debit: Accounts Receivable (in USD) $10,000
Credit: Foreign Currency Transaction Gain $10,000
Calculation: (€100,000 * $1.20) - $110,000 = $10,000

Company A remeasures the accounts receivable balance using the current exchange rate at the end of the year, resulting in a foreign currency transaction gain of $10,000.

 

ASC 987 provides guidance on the accounting treatment for foreign currency transactions, including the remeasurement of monetary items. By understanding the accounting treatment and journal entries for remeasurement of monetary items, entities can maintain accurate financial records and comply with GAAP. Proper remeasurement of monetary items is essential for reflecting the financial impact of foreign currency transactions on an entity's financial position and performance, providing transparency and comparability for investors and other stakeholders. Adherence to the provisions of ASC 987 ensures that financial statements accurately reflect the financial impact of foreign currency transactions and the related remeasurement of monetary items.