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1. Identify the currency conversion methods that you will use in the foreign currency translation procedure. The methods that will be at your disposal include: currency of books and records (CBR), which is the currency denomination used in the foreign financial statements; functional currency, which is the currency that the subsidiary routinely uses in the buying, selling and borrowing processes; and reporting currency, which is the currency in which the parent company's financial statements are denominated.
2. Choose the approach to use in the conversion of the foreign currency. Employ the temporal rate method if the functional currency is exhibiting high levels of inflation, so that you can ignore the functional currency and directly convert the CBR into the reporting currency. Choose the current rate method if the CBR is the same as the functional currency, so that you can convert the functional currency into the reporting currency.
3. Apply the current rate method to convert fixed assets and liquid items such as cash, receivables, inventories valued at market rates, payables and short-term debt that are denominated in foreign currency using the exchange rate on the balance sheet date.
4. Apply the temporal rate method to convert the foreign currency exchange rates for capital and long-term liabilities such as long-term debt, as well as dividends, prepaid expenses and inventories valued at cost.
5. Present any gains and losses resulting from the conversion in the owners' equity section as a separate item. You will have to disclose any material changes in the exchange rates occurring during the period between the financial statement date and the audit report date in the financial statements for the preceding year.