Difference between FX translation and FX revaluation
What is the difference between FX translation and FX revaluation?
Foreign currency translations are first recorded initially in the units of the foreign currency. Foreign currency is a currency other than the functional currency of the entity. Each and every foreign currency translation is revalued in the functional currency based on the official exchange rate at the end of the day. Therefore, for each transaction in foreign currency, there will be a corresponding transaction in the functional currency of the entity. This process is known as effects revaluation. The standard permits the revaluation entries to be passed based on the average rate for a week or a month for all the transactions in foreign currency occurring during that period, provided the exchange rates do not fluctuate significantly, making the use of average rate inappropriate. The monetary items will have to be measured based on the exchange rate on the day of such valuation and this process is known as FX translation. FX translation effectively reduces the currency gains or losses due to fluctuations in exchange rates between the reporting date and the date of recording the original transaction.