J-GAAP: Foreign Currency Translations

Foreign currency transactions are translated at the exchange rates as of the translations under the both Japanese GAAP and IAS 21 (revised 1993), The Effects of Changes in Foreign Exchange Rates. It was noted as a symbolic difference that Japanese GAAP used to require applying the current exchange rates to short-term monetary assets and liabilities and the historical exchange rates to long-term monetary assets and liabilities. The existing BADC’s Accounting Standard for Foreign Currency Transactions, which was revised in 1999, requires applying the current exchange rates to all monetary assets and liabilities.

Hedging instruments, including foreign currency forward contracts and other types of foreign currency derivative instruments, are accounted for in conformity with accounting standard for financial instruments. That is, hedging instruments are separately recognized as an asset or liability at fair value. The changes in fair value may be deferred if an entity adopts the deferral hedge accounting. If the entity adopts the mark-to-fair-value hedge accounting, the hedged assets or liabilities may be measured at fair value.

Foreign currency hedging instruments may also be accounted for by the “synthetic instrument approach.” Under the approach, the hedging instrument and the hedged item are accounted for as if those instruments are a combined instrument. Under the international accounting standards, foreign currency hedging instruments are accounted for in conformity of IAS 39 (1998), Financial Instruments: Recognition and Measurement.

For purposes of translating foreign currency financial statements, foreign operations are categorized into (a) foreign branches (part of legal entity) and (b) foreign subsidiaries (a separate legal entity). Financial statements of foreign branches should be translated by the temporal method. That is, financial statement items must be translated as if those items are a direct extension of the headquarter office. Financial statements of foreign subsidiaries should be translated by using the current rate method. All financial statement items, except for inter-company transactions, are translated at the current rates or average rates.