Concepts (CTBA380 - SIGACTB)

There are several terms related to Accounting in other currencies: see some of them:

Exchange variation

Exchange is the relation of values between currencies for acquisition of assets. It is the exchange of goods.

Exchange variation is the parity between the values in two currencies.

When a company imports a product, it pays the Brazilian Central Bank in Real, which in turn pays the foreign supplier in dollars, according to the day's rate.

The inverse is done in case of exports. In this case, the buyer abroad sends Dollars to the Brazilian Central Bank, which receives them and pays the Brazilian exporter in Real, according to the day's rate.

That is why the dollar rate fluctuates in order to balance the volume of imports and exports. If the dollar is quoted very low in relation to the value of goods, we have excess imports because the imported product becomes cheaper here. On the other hand, the exporter will not be able to sell his products, since he will receive very little for each dollar sold, and would prefer to sell them domestically. If the process is not checked, dollar reserves at the Central Bank would exhaust and the Government is forced to declare a moratorium, i.e, there are no more dollars to pay imports, as happened in 1983. The solution is to increase the dollar rate which, in turn, stirs up the inflationary trend by not just making products that come from abroad more expensive but also by altering all contracts and financing that are based on the exchange variation. The exchange policy is, therefore, a very important factor in the economic development of a country.

Indexation

We can also state that restatement of financial statements consists of a series of procedures adopted by the time of calculation of the Year Income, considering effects of inflation on Equity and Results of these companies.

Restatement of financial statements was revoked by Article 4 of law nr. 9,249, dated from 12/26/95. From 1/1/96, it was prohibited the use of any system of restatement in financial statements, including for corporate means.

In order to make adjustments in restatement, a careful legal approach is required, checking with Federal authorities as well as the method of restatement of financial statements. This must be made based on the Subsidiary Ledger in the Fiscal Reference Unit, in which accounts subject to restatement shall be booked, with the Fiscal Reference Unit value adopted as the unit of account.

FAS 52 / Full restatement

It is the restatement adopted by multinationals for public companies.

The restatement imposed by Brazilian law did not envisage correction of companies' stock values.

As to FAS 52, the concern is regarding converting the Balance Sheet into dollars, so that any loss of accounts is calculated.

In case of galloping inflation, the method used to adjust the values of companies' equity it to obtain actual adjustments to demonstrate losses, through a hard currency (AMERICAN DOLLAR, in this case).

See Also: FASB

Purposes of statement conversion

The main purposes of financial statement conversion are:

• To obtain financial statements in hard currency, not subject to the effects of inflation.
• To help the foreign investor better manage his investment, since converted statements shall express figures in the legal tender of his country.
• To enable application of the equity equivalence method to investments made in several countries.
• To enable consolidation and aggregation of financial statements of companies present in different countries.

Distinction between Conversion of Financial Statements and Accounting in Foreign Currency.

In case of Conversion of Financial Statements, the company maintains its accounting in local currency, in accordance with Brazilian accounting principles, and only at the end of the fiscal year, after closing financial statements in local currency, does it apply the conversion procedures. In this case, controls are maintained in foreign currency only on non-monetary items like stocks, permanent assets and net equity.

As to Accounting in Foreign Currency, operations are converted to the foreign currency as and when they are registered in the accounting system, preparing the Financial Statements in foreign currency at the end of the fiscal year, with no need for conversion.

Note that, in the first case, there is Conversion of Statements in Local Currency to Foreign Currency and in the second case, there is Conversion of Operations to Foreign Currency and its accounting in this currency.

FAS 52 Obligation

FAS 52 should be applied for converting financial statements, prepared according to the American accounting principles (US-GAAP),  which will be included in the financial statements of American companies by means of:

• Consolidation (head office and subsidiaries);
• Aggregation (merger or incorporation of two or more companies);
• Investment appraisal using the method of equity equivalence (affiliates).

When the purpose of financial statement conversion is to obtain resources from abroad or for making presentation to investors, the conversion procedures of FAS 52 need not necessarily be applied, unless specifically demanded by the creditor or investor.

Logically, this obligation does not apply for management purposes either. Even not being mandatory, companies from different countries adopt FAS 52, as it is a globally accepted methodology.

See Also: FASB