Foreign Currency

Foreign currency balances are common because many companies buy and sell products and services internationally. Although many of these transactions are denominated in foreign currencies, they are reported in U.S. dollars when financial statements are produced for distribution in this country. Because exchange rates often change rapidly, many equivalent values could be used to report these balances. According to U.S. GAAP, monetary assets and liabilities (cash as well as receivables and payables to be settled in cash) are updated for reporting purposes using the exchange rate at the date of the balance sheet. Any change in one of these accounts creates a gain or loss to be recognized on the income statement. All other foreign currency balances (land, buildings, sales, and the like) continue to be shown at the historical exchange rate in effect at the time of the original transaction.