FRA: Retained Earnings formula

[oktavian]

@MrSmart

@dwheaton

@MrSmart

@dwheaton

@MrSmart

@dwheaton

Gains can be different from OCI.

OCI is tranferred directly to equity on the balance sheet and not reflected on the income statement or retained earnings. - includes things like unrealized gains/losess on available for sale securities - actuarial gains/losses on pension obligations

GAINS are transferred through profit/loss on the income statement and through retained earnings. - these are things like gains on sale of fixed assets, or gains - unrealized gains/losses due to foreign currency translation

What?

I was simply highlighting the point that not all ‘income’ is included in RE. And gave examples of instances in which it would flow through RE and instances where it is transferred directly to equity.

How would gains/losses of currency translation flow through retained earnings?

Not sure if I understand your question correctly.

If you are wondering how unrealized gains/losses arise from foreigh currency translation consider this:

You own a multinational company with a local currency of USD and your fiscal year end is Dec.31. You also operate in China, where this use the Renmimbi, RMB. The current exhxanage rate RMB/USD is 10. You purchase manufactured goods from China on Nov 30 on credit for 100 RMB to be paid on Jan 31, and create an accounts payable for 10 USD (100/10=10). When your fiscal year end rolls around, the RMB/USD is 11. Since you are now able to pay back your debt with less USD ((100/11=9.09), you will have recorded an unrealized gain on the income statement. (10 - 9.09 = 0.91). You will also report your accounts payable as 9.09 USD instead of 10 USD due to the currency appreciation.

Don’t you mean USD/RMB?

I understand all that, my question was if and why unrealized currency translations are recorded on the income statement, and not OCI?

Let’s not nitpick… also it’s renmi n bi.

Can you explain understand by ‘unrealized currency translations’?

[dwheats]

Unrealized means it is on paper but it has not actually been gained/lost.

As in the above example, it occurs when the financial reporting date falls inbetween the credit purchase and when the account becomes due.