In accordance with the "Basic Standards for Enterprise Accounting," the Ministry of Finance issued Accounting Standard for Business Enterprises No. 19 — Foreign Currency Translation on 2006/2/15, effective as of 2007/1/1.
1. Overview of Guidelines
This standard governs the accounting treatment of foreign currency transactions, the translation of foreign currency financial statements, and related disclosures. A foreign currency transaction is a transaction denominated in or requiring settlement in a foreign currency, including the purchase or sale of goods or services priced in a foreign currency, and borrowing or lending foreign currency.
Functional currency
The functional currency is the currency of the primary economic environment in which an entity operates. An entity should normally use RMB as its functional currency. For entities whose business transactions are primarily denominated in currencies other than RMB, one such currency may be selected as the functional currency in accordance with applicable regulations. However, financial statements must be presented in RMB.
Factors for Determining the Functional Currency
- • This currency primarily affects the sales prices of goods and services.
- • This currency primarily affects labor, materials, and other costs associated with goods and services.
- Currency obtained from financing activities and the currency used to hold cash collected from operating activities
II. Accounting Treatment of Foreign Currency Transactions
Initial Confirmation
Foreign currency transactions shall be translated into the functional currency using the spot exchange rate at the transaction date. Alternatively, an approximate rate close to the spot rate on that date may be used if determined by a systematic and reasonable method.
Balance sheet date
Foreign currency monetary items are translated using the spot exchange rate at the balance sheet date. Exchange differences arising from changes in the spot exchange rate between the balance sheet date and the initial recognition date or the previous balance sheet date are recognized in profit or loss for the period.
III. Translation of Foreign Currency Financial Statements
Conversion Method
- • Assets and liabilities in the balance sheet are translated at the spot exchange rate on the balance sheet date.
- • For equity items, except for "Retained Earnings," all others are translated using the spot exchange rate at the time of occurrence.
- • Revenue and expense items in the statement of profit or loss are translated using the spot exchange rate on the transaction date or an approximate rate.
- • Foreign currency translation differences arising from the conversion of foreign financial statements are presented separately under equity in the balance sheet.
Dispose of overseas operations
When disposing of a foreign operation, an entity shall transfer the foreign currency translation differences related to that foreign operation, presented under equity in the balance sheet, from equity to profit or loss for the period of disposal. If disposed of partially, the portion of the foreign currency translation differences attributable to the part disposed of shall be calculated based on the disposal ratio and transferred to profit or loss for the period of disposal.
Regulatory Document Attachment
Accounting Standards for Business Enterprises No. 19 — Foreign Currency Translation (PDF)