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Conversion of Foreign Currency Assets under Significant Fluctuation in Exchange Rates

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1. Introduction

Due to the pandemic and some other factors that are going on in the world, foreign exchange rates have been significantly fluctuating. Under Japanese Corporation Tax Law, in cases where companies hold assets and liabilities denominated in foreign currencies (hereinafter, foreign currency assets) at fiscal year-end, they should be translated into Japanese yen in the financial statements. 
In this News, we will mention how to convert foreign currency assets into Japanese yen for tax purposes. Above all, we will focus on the case where exchange rates fluctuate significantly.

2. Basic conversion rules

According to Japanese Corporation Tax Law, there are two conversion methods of foreign currency assets: Transaction-Date Conversion Method (converted by the exchange rate on the transaction date) and Fiscal Year-end Conversion Method (converted by the exchange rate at fiscal-year end). Companies can select the conversion method in accordance with the category of foreign currency assets.
In principle, conversion into yen is performed by TTM (the middle rate of the telegraphic transfer selling (TTS) rate and the telegraphic transfer buying (TTB) rate. As an exceptional rule, TTS and TTB may also be used, provided that the same method is applied continuously. In addition, the average TTM, TTB, and TTS of a certain period within the last month including the fiscal year-end may be used.

3. Significant fluctuation in exchange rates

In cases where exchange rates fluctuate significantly, companies can convert foreign currency assets by using the exchange rate at fiscal year-end even if Transaction-Date Conversion Method is applied. In this case, the company does not need to reverse the valuation of such foreign currency assets in the next fiscal-year.
In detail, the significant fluctuation in exchange rates means 15% or more of the fluctuation rate in the valuation of each foreign currency asset. In cases where exchange rates change significantly, companies need to judge the conversion of foreign currency assets carefully.

4. Conclusion

In this News, we mentioned “Conversion of Foreign Currency Assets under Significant Fluctuation in Exchange Rates.” Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.

(Reference / Japanese)
National Tax Agency 
Part 2 Conversion of Foreign Currency Assets