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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II DETERMINATION OF FUNCTIONAL CURRENCY CHAPTER III ACCOUNTING TREATMENTS FOR FOREIGN CURRENCY TRANSACTIONS CHAPTER IV TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS CHAPTER V DISCLOSURE CHAPTER I GENERAL PROVISIONS Article 1. For the purpose of regulating the accounting treatments for the foreign currency transactions, conversion of foreign currency financial statements, and disclosure of relevant information, these Standards are formulated in accordance with the Accounting Standards for Enterprises-Basic Standards. Article 2. The "foreign currency transaction" refers to a transaction which is denominated and settled in a foreign currency. The "foreign currency" refers to a currency other than the functional currency of an enterprise. The foreign currency transactions include: (1) The purchase or sale of goods or services denominated in a foreign currency; (2) Borrowing or lending foreign currency funds; and (3) Other transactions which are denominated or settled in a foreign currency. Article 3. The following items are governed by other relevant accounting standards: (1) The exchange differences arising from foreign currency borrowings for the acquisition, purchase or production of qualifying assets shall be governed by the Accounting Standards for Enterprises No. 17-Borrowing Costs; (2) The hedge of foreign currency items shall be governed by the Accounting Standards for Enterprise No. 24-Hedging; and (3) The translation of a foreign currency in the cash flow statement shall be governed by the Accounting Standards for Enterprises No. 31-Cash Flow Statement. CHAPTER II DETERMINATION OF FUNCTIONAL CURRENCY Article 4. The "functional currency" refers to the currency of the primary economic environment in which the enterprise is operated. Generally an enterprise shall choose RMB as its functional currency. For an enterprise of which the incomes and expenses are mainly denominated in a currency other than RMB, it may choose a currency as its functional currency in accordance with Article 5 of these Standards. However, the financial statements shall be translated into RMB. Article 5. When an enterprise chooses a functional currency, it shall take account of the following factors: (1) This currency mainly affects the selling prices of goods and services and generally the goods and services are denominated and settled in this currency; (2) This currency mainly affects the labor, materials and other costs for the goods and services and generally the goods and services are denominated and settled in this currency; and (3) The currency acquired in financing as well as the currency utilized to preserve the money charged in the business operations. Article 6. When an enterprise chooses the functional currency for its overseas business, it shall also taking account of the following factors: (1) Whether or not the overseas businesses are strongly independent from the activities in which it is engaged in; (2) Whether or not the transactions with the enterprise in overseas business operations account for a relatively large proportion in overseas business operations; (3) Whether or not the cash flow incurred in overseas business operations directly affect the cash flow of the enterprise, whether or not the cash may be remitted back at any time; (4) Whether or not the cash flow incurred in overseas business operations is sufficient to settle its current liabilities and predictable liabilities. Article 7. The "overseas business operations" refers to the enterprise's overseas subsidiary companies, joint ventures, associated enterprises and branches. If the domestic subsidiary company, joint venture, associated enterprise or branch of an enterprise adopts a functional currency which is difference from that of the enterprise, it shall be deemed as overseas business. Article 8. Once the functional currency of an enterprise is determined, it shall not be modified at will, unless the main economic environment in which the enterprise is operating has changed significantly. Where it is really necessary to modify the functional currency because the primary economic environment in which the enterprise is operated has changed significantly, the enterprise shall translate all items into the post-change functional currency at the spot exchange rate of the current date of the change. CHAPTER III ACCOUNTING TREATMENTS FOR FOREIGN CURRENCY TRANSACTIONS Article 9. For a foreign currency transaction, the enterprise shall translate the amount in a foreign currency into amount in its functional currency. Article 10. At the time of initial recognition of foreign currency transaction, the amount in a foreign currency shall be translated into amount in the functional currency at the spot exchange rate of the transaction date, or at an exchange rate which is determined through a systematic and rational method and which is approximate to the spot exchange rate of the transaction date. Article 11. An enterprise shall, on the balance sheet date, treat the foreign currency monetary items and foreign currency non-monetary items according to the following provisions: (1) The foreign currency monetary items shall be translated at the spot exchange rate on the balance sheet date. The exchange difference arising from the difference between the spot exchange rate on the balance sheet date and the spot exchange rate at the time of initial recognition or prior to the balance sheet date shall be recorded in the profits and losses in the current period. (2) A foreign currency non-monetary item measured at the historical costs shall still be translated at the spot exchange rate on the transaction date, of which the amount of functional currency shall not be changed. The "monetary items" refers to the money held by an enterprise and the assets and liabilities to be received or paid in fixed or the determinable amounts of money. The "non-monetary items" refers to the items other than the monetary items. CHAPTER IV TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS Article 12. To translate the financial statements about the overseas businesses of an enterprise, it shall comply with the following provisions: (1) The asset and liability items in the balance sheets shall be translated at a spot exchange rate on the balance sheet date. Among the owner's equity items, except for the items as "undistributed profits", other items shall be translated at the spot exchange rate at the time when they are incurred; and (2) The income and expense items in the profit statements shall be translated at the spot exchange rate of the transaction date, or at a spot exchange rate which is determined through a systematic and rational method and which is approximate to the spot exchange rate of the transaction date. The differences arising from the translation of foreign currency financial statements in compliance with the aforesaid Items (1) and (2) shall be presented separately under the owner's equities of the balance sheets. The translation of comparable financial statements shall be governed by the aforesaid provisions. Article 13. An enterprise shall translate the financial statements of overseas businesses situated in a hyperinflationary economy according to the following provisions: It shall restate the balance sheet items by utilizing the general price index, restate the items of the profit statement by utilizing the changes of the general price index, and then translate them at the spot exchange rate on the recent balance sheet date. If an overseas business is no longer situated in the hyperinflationary economy, it shall stop the restatement and shall translate the restated financial statements at the price of the cessation date. Article 14. Where an enterprise disposes of an overseas business, it shall shift the differences, which is presented under the items of the owner's equities in the balance sheet and which arises from the translation of foreign currency financial statements relating to this overseas business, into the disposal profits and losses of the current period. If the overseas business is disposed of partially, the enterprise shall calculate the differences arising from the translation of foreign currency statements of the part of disposal based on the disposal rate and shall shift them into the profits and losses of the current period. Article 15. If an enterprise does not choose RMB as its functional currency, it shall translate its financial statements into RMB financial statements in accordance with Article 12 of these Standards. CHAPTER V DISCLOSURE Article 16. An enterprise shall, in its notes, disclose the following information relating to the translation of foreign currencies: (1) The functional currency chosen by an enterprise and its overseas businesses as well as the reasons for such choice; if the functional currency is changed, the grounds for the change shall be given; (2) If an approximate exchange rate is adopted, the method for the determination of the approximate exchange rate shall be given; (3) The exchange differences which are recorded in the profits and losses of the current period; and (4) The effects of disposal of any overseas businesses on the differences arising from the translation of foreign currency financial statements. |
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