Foreign Currency Translation: Types of Currency

Alright, let’s just dive straight into Translation — the main content of chapter 3.

This part actually ties right into consolidated accounting.

Since Samsung US is a subsidiary that gets rolled into the consolidation, when Samsung Electronics consolidates, Samsung US has to come along for the ride. And of course Samsung US’s financial statements are written in English lol, and the numbers are all in dollars (cries). So the first thing that has to happen is USD → KRW conversion, and the how of that conversion!! is exactly what “Translation” means here.

To study this, you’ve gotta know a tiny bit about currency concepts first… heh

Before we go anywhere, we need to nail down the different currencies that show up in multinational accounting.

➀ Local Currency (LC):

Just whatever country you’re sitting in (Samsung’s LC is KRW, SONY’s LC is JPY).

➁ Functional Currency (FC):

This one is something management gets to decide.

It’s the currency of the environment where the company’s main economic activity is actually happening.

So yeah, the functional currency can totally be a foreign currency.

OK so what’s Samsung Electronics’ functional currency?…

It’s KRW!! For pretty much every Korean company, the functional currency gets set to won. heh

Could there be cases where the functional currency isn’t the home currency?? → Yeah, we’ll see an example in a bit.

➂ Presentation (Reporting) Currency (PC):

The currency you use when you actually write up the financial statements.

Example. Samsung Electronics’ HQ is in Korea, so LC is KRW.

When Samsung is out there making its big decisions, the base currency for that is KRW too — so FC is also KRW.

And since the financial statements all come out in KRW as well, PC is also KRW.

(Side note — to file financial reports in Korea, you’re actually not required to write them in KRW. Back in the day, if you popped into DART and pulled up Chinese subsidiaries, they were all disclosing in yuan.)

Samsung Electronics’ US subsidiary, on the other hand — its LC is USD.

As for PC.. the statements they file with US regulators on the ground would obviously be written in USD,

but for CFA purposes generally, the PC of a consolidated entity is defined as whatever the ultimate parent ends up disclosing in, apparently…

So we have to say their PC is KRW.

The tricky one is Samsung US’s FC..

This one swings depending on the situation..

If the subsidiary is

totally independent from Samsung HQ and just doing its own thing entirely in the US,

then FC = USD.

But if it’s not like that — if it’s leaning on Korean HQ for everything — then FC has to be KRW.

But wait… there are cases where FC is neither KRW nor USD..

Imagine the subsidiary was set up way out near San Diego

specifically to sell stuff into Mexico,

and there were a bunch of headaches with actually placing a company in Mexico,

so they parked it on the nearest US side instead —

in that case, FC could be the Mexican peso..

Anyway, functional currency is kind of a big deal lol.

Depending on the situation, FC can be anything, and you’ve gotta develop a feel for it!!!

OK so how do you actually do the conversion!!!! There are two methods we’re going to study.

1. Current Rate Method / 2. Temporal Method

This chapter isn’t about deep theoretical understanding — it’s more of an “ah, so that’s how it’s done” kind of thing. Just knowing the technical methodology is enough, and it’s not even that complicated!!

Just get a feel for — in this kind of situation you convert this way, in that kind of situation you convert that way — and move on. Don’t forget, this is that kind of chapter!!

And for exam purposes, what is important is understanding the differences between the two methodologies well!!

Originally written in Korean on my Naver blog (2025-01). Translated to English for gdpark.blog.