Foreign Subsidiaries: Currency Translation vs. Remeasurement Under ASC 830

te equity, or worse, trigger audit and investor scrutiny.

Currency translation versus remeasurement is not an accounting elective. It is a governance of economic substance. It answers a deceptively simple question: Is the subsidiary a standalone economic unit, or an extension of the parent’s operations? That single answer dictates whether foreign currency impacts flow through equity or the income statement — and by extension, how executives interpret financial performance.

Two Methods. One Critical Choice.

ASC 830 outlines two primary methods of handling foreign currency financial statements:

1. Translation (for foreign operations with a different functional currency)
2. Remeasurement (for foreign operations using the parent’s functional currency but reporting in a local currency)

The choice between them hinges on the functional currency — defined as the currency of the primary economic environment in which the entity operates. Not where it is incorporated. Not where its bank account sits. But where it earns, spends, and creates value.

When Translation Applies: Functional Currency ? Reporting Currency

If a foreign subsidiary conducts its business in its own local currency — generating revenues, paying expenses, and making capital investments in, say, euros — then the euro is its functional currency. Even if the parent reports in U.S. dollars, the subsidiary’s books are maintained in euros, and translation is required.

Under the current rate method:

• Assets and liabilities are translated at the end-of-period spot rate
• Revenues and expenses are translated at average rates for the period
• Equity components are translated at historical rates
• The resulting currency translation adjustment (CTA) flows to other comprehensive income (OCI), not the income statement

This approach isolates operating performance from currency volatility. It recognizes that FX movement does not affect ongoing business performance — until those earnings are repatriated or assets are sold.

When Remeasurement Applies: Local Currency ? Functional Currency

Remeasurement is triggered when an entity maintains its books in a currency different from its functional currency. This often happens when a branch office in Brazil invoices and transacts in U.S. dollars, but keeps local statutory books in Brazilian reais to comply with regulations.

Under the temporal method:

• Monetary assets and liabilities (cash, receivables, payables) are remeasured at the current rate
• Non-monetary assets (inventory, fixed assets) are remeasured at historical rates
• Revenue and expenses related to non-monetary items (like depreciation or COGS) use historical rates
• The remeasurement gain or loss flows to the income statement

Unlike translation, remeasurement affects earnings. It injects FX volatility into reported net income, sometimes dramatically so — especially in inflationary or high-devaluation environments.

Functional Currency: Where Judgment Lives

Choosing the functional currency is not always obvious, and ASC 830 offers a list of indicators, including:

• Currency in which sales prices are denominated
• Currency of the country whose competitive forces and regulations most affect pricing
• Currency in which financing is denominated
• Currency in which labor, materials, and other costs are incurred

In my experience, SaaS companies with local sales subsidiaries often default to USD as functional currency, even when customers pay in local currency. This is a red flag. If the local entity hires local staff, collects local receivables, and pays local taxes, the functional currency may well be local — triggering translation, not remeasurement.

Conversely, I have seen hardware companies structure their supply chains such that all procurement, pricing, and contracts flow through a central entity, even though fulfillment occurs abroad. In such cases, remeasurement may be more accurate.

Implications for Consolidated Reporting

The choice between translation and remeasurement can materially affect:

• Net income volatility: Remeasurement gains/losses hit the income statement. Translation effects sit quietly in OCI.
• Equity fluctuations: CTA accumulated in equity can grow large, especially with long-standing subsidiaries in volatile markets.
• Covenant compliance: Changes in net income due to remeasurement can affect interest coverage and EBITDA-linked metrics.
• Tax consequences: Some jurisdictions treat FX gains/losses differently depending on whether they are realized or unrealized.

In one case I advised, a global consumer electronics company remeasured its Latin American subsidiary in USD, generating $4.5 million of FX losses during a period of currency devaluation. These losses hit GAAP net income, surprising investors and triggering a reconsideration of the functional currency designation.

We ultimately concluded the functional currency should have been local. A restatement followed. The accounting change had no cash impact — but materially affected credibility.

System and Process Readiness

Managing FX accounting under ASC 830 is not simply about policy. It requires ERP alignment, data integrity, and process discipline:

• Rate sourcing: Spot and average rates must be accurate and consistently applied
• Layered historical costs: Systems must track historical rates for fixed assets and equity injections
• Audit trails: Clear documentation for functional currency determinations is essential
• Forecast sensitivity: Finance teams must model how FX movements affect both OCI and net income

Steps for Finance Leaders

1. Review all foreign entities and document functional currency rationale annually
2. Ensure your ERP supports both translation and remeasurement mechanics with appropriate rate application
3. Educate FP&A and investor relations teams on where FX volatility will appear — income vs. equity
4. Analyze CTA balances and understand their potential impact if subsidiaries are divested or repatriated
5. Incorporate FX impact into board narratives with clarity, especially if currency movements materially affect reported results

Conclusion: Location Matters, But Currency Choice Matters More

In today’s global enterprise, where supply chains, customers, and teams span continents, the way we account for foreign operations must mirror the economic reality of how those businesses operate. ASC 830 gives us the framework. But it demands clarity of judgment and discipline in execution.

Currency translation and remeasurement are not just technical choices. They are decisions that shape the financial narrative — of risk, return, and resilience.

Call to Action

If your company operates internationally, take time this quarter to review your currency accounting under ASC 830. Evaluate functional currency designations, validate FX rate sources, and stress-test your translation and remeasurement impacts. Your future audits — and your earnings guidance — depend on it.