Following settlement date accounting, the asset as well as the liability is recognized on the settlement date. Here the asset gets recorded only at the value at which it is actually settled, the difference between the cost of acquisition actually payable for such investment and the value at which it is recorded in the books of accounts being taken as realized gains on the date of acquisition itself. If the asset is held for trading then it is taken to the profit and loss account directly, and if the asset is an ‘available-for-sale’ asset then it is taken directly to the equity as ‘other comprehensive income’.
Even if the asset happens to be in foreign currency, since the asset is recorded only the date of settlement, the revaluation entries in the functional currency is recorded only at the rate at which it actually gets settled and hence there is no necessity to record any FX translation entries in this case.
When an asset is purchased, in trade date accounting, the asset is recognized and brought into the books of account on the date of trade and a corresponding liability is established. The liability is knocked off when the settlement of the liability happens. When the asset purchased is in a foreign currency, it leads to a little more complication. The asset is recognized in the functional currency in which the reporting is made, on the basis of the foreign exchange rate that prevails as on the date of trade. The corresponding liability is also created equivalent to the asset purchased. However when the settlement is done after a few days, the foreign exchange rate is likely to be different from the rate at which the asset was converted. Hence when recording the settlement event in the functional currency, the liability would appear to be settled in the functional currency as either over paid or under paid. This is dealt with by passing appropriate FX translation entry known as ‘Consummated FX translation entry’.
This represents accounting for currency gains or losses that are seen on the continuing assets or liabilities of the investor. Example of this type includes the currency gains on the market value of the equity shares as recorded in the functional currency. This type of gain or loss is of temporary in nature and will be either reversed the next day or passed on an incremental basis, meaning that it is subject to change on a daily basis depending upon the FX rates prevailing at that day. This is called ‘Transient FX translation entries‘
This represents accounting for currency gains or losses that are realized or consummated. Example of this type includes the currency gains realized on the amounts payable to broker and the amount actually paid to the broker as recorded in the functional currency. The difference between the amount payable and the actual amount paid recorded in the functional currency represents the realized currency gains or losses. This is called ‘Consummated FX translation entries’.
Investments in equity securities that are purchased and held for short term principally for the purpose of generating gains on resale are classified as trading securities and reported at fair value with unrealized gains and losses included in the earnings.
Investments in equity securities that are not trading securities are classified as available-for-sale (AFS) securities and reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity. These are typically short term investments made by the investor. It is generally presumed that if the investor holds less than 20% voting rights of the investee company then no significant influence can be exercised on the investee company unless there is evidence to prove otherwise. Cost method is adopted for investments of this nature.
