A method of converting a foreign currency involved in a transaction in which the local currency is translated at the exchange rate in operation on the date on which the transaction occurred. If rates do not fluctuate significantly, an average for the period may be used as an approximation. Any exchange gain or loss on translation is taken to the profit and loss account. This contrasts with the closing rate or net-investment method of translation, which uses the exchange rate ruling at the balance-sheet date for translation and takes exchange differences to reserves. Under Statement of Standard Accounting Practice (SSAP) 20, Foreign Currency Translation, either method may be adopted. This area is now governed by the detailed regulations in Financial Reporting Standard 23, The Effects of Change in Foreign Exchange Rates, which was issued in 2004.
Subjects: Financial Institutions and Services — Accounting.