A reporting entity must translate the functional currency financial statements of any foreign entity, whether consolidated or accounted for using the equity method of accounting, to include them in its consolidated financial statements. This is true whether the reporting entity is a parent company or a subsidiary. For example, in a multi-leveled organization with a parent holding company and first- and second-tier subsidiaries, the financial statements of the second-tier subsidiary are first translated for inclusion in the first-tier subsidiary’s financial statements and then those financial statements are translated for inclusion in the parent’s consolidated financial statements.
The steps needed to translate a foreign entity’s financial statements depend on whether the foreign entity’s books and records are maintained in the foreign entity’s functional currency or another currency.
As discussed in ASC 830-10-45-17, when a foreign entity’s books and records are not maintained in its functional currency, the reporting entity must first remeasure the financial statements into its functional currency and then translate the foreign entity’s financial statements into the reporting currency. Figure FX 5-1 summarizes the steps a reporting entity should take to translate the financial statements of its foreign entities into its reporting currency.