Translation of Foreign Currency Financial Statements

problem resolved

apologies everyone, but I posted an answer to my original question, which was quite long. the server crashed, so I lost this summary, don’t feel like writing again.

I read your long summary. I had the same question in my mind on why Deferred revenue is non-monetary liability?

How did you figure it out?


Rocketmania, many thanks for your interest. At the risk of CFA Institute killing a potentially interesting question on the exam after reading below :slight_smile:

I realised that in my question I had confused Deferred Revenue with Unearned Revenue and the respective accounting treatments. Anyway, the following applies:

Deferred Revenue triggers the following booking: Cash (A) / Deferred Revenue (L)

Accrued Expenses triggers the following booking: Expense (Expense account in I/S) / Accrued Expense (L)

This is the solution! Deferred Revenue embodies an already occurred cash receival. Therefore, the left side of the equation, the Cash, will henceforth be treated as a monetary asset. The right side though, will correctly be treated as a non-monetary liability, because the Cash has already arrived and is treated as “Cash” (i.e. a monetary asset) on the left side of the equation. Deferred Revenue however, is simply a Liability which does not “expect” any more cash, therefore it is a non-monetary liability.

Accrued Expenses on the other hand expects cash to be withdrawn from the B/S in the future, which is why we “track” the FX rate developpment “mark-to-market” by using the current rate for translation (both current and temporal method). Makes sense.

The only thing which I find somewhat weird is that Deferred Revenue is translated using the current rate in the Current Method, although it is treated as a Non-Monetary Liability! Basically this means that no volatility in this position caused by altering FX rates will be recognised in equity until the transitory position is eliminated, i.e. revenue booked. This is because Cash on the other side is treated the same, therefore offsets with Deferred Revenue. Well, having said that, it seems to be though rather an arbitrary accounting convention than something which “does not make sense” (who would doubt IFRS?): Once the transitory position is eliminated, the cash would be left “alone” on the left side and the impact of the changing FX rates on its value (determined by the current rates) would not be “set off” by the Deferred Revenue on the other side (anymore). Probably IFRS wanted to prevent cashing in FX gains before being certain that the deferred revenue will be realised. But most likely we would recognise the deferred revenue sooner or later given that we have the cash already, therefore still find the Temporal Method makes more sense (historical rate for Deferred Revenue translation).

I hope the above makes sense. I am not an Accountant and it’s neither my favorite topic.

Got it.

Thanks for your time.