Assets | Amount in ¥ | Translation rate | Amount in $ |
Yen | 120,000 | $1 = ¥120 (spot rate-12/31/21) | $1,000.00 |
Land | 55,000 | 1 = ¥110 (yearly average rate-2021) | 500.00 |
Total assets | 1,500.00 | ||
Liabilities: | |||
Bank Loan | 10,000 | 1 = ¥120 (spot rate-12/31/21) | 83.33 |
Total liabilities | 83.33 | ||
2021 ending OFCNV | 1,416.67 |
The closing balance sheet of U.K. Branch for 2021 reflected one liability, [POUND]50 of long-term debt entered into in 2020 with F Bank, an unrelated bank.
The office, truck, stock, and inventory are historic assets (as defined in § 1.987-1(e) ). The [POUND]100 and long-term debt are marked items (as defined in § 1.987-1(d) ). Assume that U.S. Corp translated U.K. Branch's 2021 closing balance sheet as follows:
Assets | Amount in [POUND] | Translation rate | Amount in $ |
Pounds | 100.00 | [POUND]1 = $1.05 (convention rate-Dec. 2021) | 105.00 |
Office | 1,000.00 | [POUND]1 = $0.90 (historic rate-2020) | 900.00 |
Truck | 200.00 | [POUND]1 = $0.90 (historic rate-2020) | 180.00 |
Stock | 50.00 | [POUND]1 = $1.00 (historic rate-2021) | 150.00 |
Inventory | 100.00 | [POUND]1 = $1.00 (historic rate-2021) | 100.00 |
Total assets | 1,435.00 | ||
Liabilities: | |||
Bank Loan | 50.00 | [POUND]1 = $1.05 (convention rate-Dec. 2021) | 52.50 |
Total liabilities | 52.50 | ||
2021 ending OFCNV | 1,382.50 |
Item | Amount in [POUND] | Translation rate | Amount in $ |
Gross receipts | 300.00 | [POUND]1 = $1.10 (yearly average rate-2022) | 330.00 |
Less: | |||
COGS | (100.00) | [POUND]1 = $1.00 (historic rate-2021) | (100.00) |
Gross income | 230.00 | ||
Dep: | |||
Office | (33.00) | [POUND]1 = $0.90 (historic rate-2020) | (29.70) |
Truck | (40.00) | [POUND]1 = $0.90 (historic rate-2020) | (36.00) |
Other expenses | (30.00) | [POUND]1 = $1.10 (yearly average rate-2022) | (33.00) |
Total expenses | (98.70) | ||
Section 987 taxable income | 131.30 |
Accordingly, U.K. Branch has $131.30 of section 987 taxable income in 2022.
Assets | Amount in [POUND] | Translation rate | Amount in $ |
Pounds | 240.00 | [POUND]1 = $1.15 (convention rate-Dec. 2022) | 276.00 |
Office | 967.00 | 1 = $0.90 (historic rate-2020) | 870.30 |
Truck | 160.00 | [POUND]1 = $0.90 (historic rate-2020) | 144.00 |
Inventory | 100.00 | [POUND]1 = $1.10 (historic rate-2022) | 110.00 |
Computer | 9.09 | [POUND]1 = $1.10 (historic rate-2022) | 10.00 |
Stock | 150.00 | [POUND]1 = $1.00 (historic rate-2021) | 150.00 |
Total assets | 1,560.30 | ||
Liabilities: | |||
Bank Loan | 50.00 | [POUND]1 = $1.15 (convention rate-Dec. 2022) | 57.50 |
Total liabilities | 57.50 | ||
2022 ending OFCNV | 1,502.80 | ||
Less: | |||
2021 ending OFCNV | (1,382.50) | ||
Change in OFCNV | 120.30 |
Asset | Amount in [POUND] | Translation rate | Amount in $ |
[POUND]30 | 30.00 | [POUND]1 = $1.15 (convention rate-Dec. 2022) | 34.50 |
Asset | Amount in $ | ||
Computer | 10.00 |
Step | Amount in $ | Balance |
1 | + 120.30 | $120.30 |
2 | + 34.50 | 154.80 |
3 | - 10.00 | 144.80 |
4 | - 0 | 144.80 |
5 | + 0 | 144.80 |
6 | - 131.30 | 13.50 |
7 | + 0 | 13.50 |
8 | - 0 | 13.50 |
Thus, U.S. Corp's unrecognized section 987 gain for 2022 with respect to U.K. Branch is $13.50. As of the end of 2022, before taking into account the recognition of any section 987 gain or loss under § 1.987-5 , U.S. Corp's net unrecognized section 987 gain is $43.50 (that is, $30.00 accumulated from prior years, plus $13.50 in 2022).
Year | Yearly average exchange rate | December 31 spot rate |
2020 | ¬1 = $1.00 | ¬1 = $1.00 |
2021 | ¬1 = $1.50 | ¬1 = $2.00 |
2022 | ¬1 = $2.50 | ¬1 = $3.00 |
Item | Amount in ¬ | Translation rate | Amount in $ |
Sales revenue | 140 | ¬1 = $1.50 (yearly avg. rate-2021) | 210 |
COGS before adjustments | 70 | ¬1 = $1.50 (yearly avg. rate-2021) | 105 |
Adjustment for cost recovery deductions (see calculation below) | (20) | ||
Adjustment for beginning inventory (none) | 0 | ||
Adjusted COGS | 85 | ||
SG&A: | |||
Depreciation on building (50%) | 10 | ¬1 = $1.00 (historic rate-2020) | 10 |
Salaries | 10 | ¬1 = $1.50 (yearly avg. rate-2021) | 15 |
Total SG&A | 25 | ||
Section 987 net income (revenue less COGS and SG&A) | 100 |
COGS Adjustments.
Adjustment for cost recovery deductions included in inventoriable costs.
Depreciation amount | Historic rate | 2021 yearly avg. rate | Difference in translation rates | Adjustment (depreciation * change in rates) |
¬10 (building) | 1.00 | 1.50 | (0.50) | ($5) |
¬30 (machine) | 1.00 | 1.50 | (0.50) | (15) |
Total adjustment for cost recovery deductions | (20) |
Under the simplified inventory method, the OFCNV of Business A for 2020 and 2021 is determined under paragraph (e) of this section as follows:
OFCNV-End of 2021
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 160 | ¬1 = $2.00 (year-end spot rate-2021) | 320 |
Building | 760 | ¬1 = $1.00 (historic rate-2020) | 760 |
Machine | 270 | ¬1 = $1.00 (historic rate-2020) | 270 |
Inventory | 40 | ¬1 = $1.50 (yearly average rate-2021) | 60 |
Total assets | 1,410 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2021 ending OFCNV | 1,410 |
OFCNV-End of 2020
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 100 | ¬1 = $1.00 (year-end spot rate-2020) | 100 |
Building | 780 | ¬1 = $1.00 (historic rate-2020) | 780 |
Machine | 300 | ¬1 = $1.00 (historic rate-2020) | 300 |
Total assets | 1,180 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2020 ending OFCNV | 1,180 |
2021 ending OFCNV | $1,410 |
Less: 2020 ending OFCNV | (1,180) |
Change in OFCNV | 230 |
Change in OFCNV | $230 |
Less: section 987 taxable income | (100) |
Unrecognized section 987 gain | 130 |
Plus: Net accumulated unrecognized section 987 gain or loss from prior years | 0 |
Net unrecognized section 987 gain | 130 |
Item | Amount in ¬ | Translation rate | Amount in $ |
Sales revenue | 180 | ¬1 = $2.50 (yearly avg. rate-2022) | 450 |
COGS before adjustments | 96 | ¬1 = $2.50 (yearly avg. rate-2022) | 240 |
Adjustment for cost recovery deductions (see calculation below) | (60) | ||
Adjustment for beginning inventory (see calculation below) | (40) | ||
Adjusted COGS | 140 | ||
SG&A: | |||
Depreciation on building (50%) | 10 | ¬1 = $1.00 (historic rate-2020) | 10 |
Salaries | 10 | ¬1 = $2.50 (yearly avg. rate-2022) | 25 |
Total SG&A | 35 | ||
Section 987 net income (revenue less COGS and SG&A) | 275 |
COGS Adjustments.
Adjustment for cost recovery deductions.
Depreciation amount | Historic rate | 2022 yearly avg. rate | Difference in translation rates | Adjustment (depreciation * change in rates) |
¬10 (building) | 1.00 | 2.50 | (1.50) | ($15) |
¬30 (machine) | 1.00 | 2.50 | (1.50) | (45) |
Total adjustment for cost recovery deductions | (60) |
Adjustment for beginning inventory.
Prior year ending inventory | 2021 yearly avg. rate | 2022 yearly avg. rate | Difference in translation rates | Adjustment (inventory * change in rates) |
¬40 | 1.50 | 2.50 | (1.00) | ($40) |
Total adjustment for beginning inventory | (40) |
OFCNV-End of 2022
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 260 | ¬1 = $3.00 (year-end spot rate-2022) | 780 |
Building | 740 | ¬1 = $1.00 (historic rate-2020) | 740 |
Machine | 240 | ¬1 = $1.00 (historic rate-2020) | 240 |
Inventory | 54 | ¬1 = $2.50 (yearly average rate-2022) | 135 |
Total assets | 1,895 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2022 ending OFCNV | 1,895 |
2022 ending OFCNV | $1,895 |
Less: 2021 ending OFCNV | (1,410) |
Change in OFCNV | 485 |
Change in OFCNV | $485 |
Less: Section 987 taxable income | (275) |
Unrecognized section 987 gain 2022 | 210 |
Plus: Net accumulated unrecognized section 987 gain from prior year | 130 |
Net unrecognized section 987 gain | 340 |
Item | Amount in ¬ | Translation rate | Amount in $ |
Sales revenue | 140 | ¬1 = $1.50 (yearly avg. rate-2021) | 210 |
COGS before adjustments | 70 | ¬1 = $1.50 (yearly avg. rate-2021) | 105 |
Adjustment for cost recovery deductions (same as Example 1) | (20) | ||
Adjustment for LIFO liquidation (none) | 0 | ||
Adjusted COGS | 85 | ||
SG&A: | |||
Depreciation on building (50%) | 10 | ¬1 = $1.00 (historic rate-2020) | 10 |
Salaries | 10 | ¬1 = $1.50 (yearly avg. rate-2021) | 15 |
Total SG&A | 25 | ||
Section 987 net income (revenue less COGS and SG&A) | 100 |
OFCNV-End of 2021
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 160 | ¬1 = $2.00 (year-end spot rate-2021) | 320 |
Building | 760 | ¬1 = $1.00 (historic rate-2020) | 760 |
Machine | 270 | ¬1 = $1.00 (historic rate-2020) | 270 |
Inventory | 40 | ¬1 = $1.50 (historic rate-2021) | 60 |
Total assets | 1,410 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2021 ending OFCNV | 1,410 |
OFCNV-End of 2020
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 100 | ¬1 = $1.00 (year-end spot rate-2020) | 100 |
Building | 780 | ¬1 = $1.00 (historic rate-2020) | 780 |
Machine | 300 | ¬1 = $1.00 (historic rate-2020) | 300 |
Total assets | 1,180 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2020 ending OFCNV | 1,180 |
2021 ending OFCNV | $1,410 |
Less: 2020 ending OFCNV | (1,180) |
Change in OFCNV | (230) |
Change in OFCNV | $230 |
Less: section 987 taxable income | (100) |
Unrecognized section 987 gain | 130 |
Plus: Net accumulated unrecognized section 987 gain or loss from prior years | 0 |
Net unrecognized section 987 gain | 130 |
Item | Amount in ¬ | Translation rate | Amount in $ |
Sales revenue | 180 | ¬1 = $2.50 (yearly avg. rate-2022) | 450 |
COGS before adjustments | 99.20 | ¬1 = $2.50 (yearly avg. rate-2022) | 248 |
Adjustment for cost recovery deductions (same as Example 3) | (60) | ||
Adjustment for LIFO liquidation (none) | 0 | ||
Adjusted COGS | 188 | ||
SG&A: | |||
Depreciation on building (50%) | 10 | ¬1 = $1.00 (historic rate-2020) | 10 |
Salaries | 10 | ¬1 = $2.50 (yearly avg. rate-2022) | 25 |
Total SG&A | 35 | ||
Section 987 net income (revenue less COGS and SG&A) | 227 |
OFCNV-End of 2022
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 260.00 | ¬1 = $3.00 (year-end spot rate-2022) | 780 |
Building | 740.00 | ¬1 = $1.00 (historic rate-2020) | 740 |
Machine | 240.00 | ¬1 = $1.00 (historic rate-2020) | 240 |
Inventory | 10.80 | ¬1 = $2.50 (historic rate-2022) | 27 |
40.00 | ¬1 = $1.50 (historic rate-2021) | 60 | |
Total assets | 1,847 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2022 ending OFCNV | 1,847 |
2022 ending OFCNV | $1,847 |
Less: 2021 ending OFCNV | (1,410) |
Change in OFCNV | 437 |
Change in OFCNV | $437 |
Less: section 987 taxable income | (227) |
Unrecognized section 987 gain 2022 | 210 |
Plus: net accumulated unrecognized section 987 gain from prior years | 130 |
Net unrecognized section 987 gain | 340 |
Item | Amount in ¬ | Translation rate | Amount in $ |
Sales revenue | 252 | ¬1 = $3.50 (yearly avg. rate-2023) | 882 |
COGS before adjustments | 140.80 | ¬1 = $3.50 (yearly avg. rate-2023) | 492.80 |
Adjustment for cost recovery deductions (see calculation below) | (100.00) | ||
Adjustment for LIFO liquidation (see calculation below) | (30.80) | ||
Adjusted COGS | 362.00 | ||
SG&A: | |||
Depreciation on building (50%) | 10 | ¬1 = $1.00 (historic rate-2020) | 10 |
Salaries | 10 | ¬1 = $3.50 (yearly avg. rate-2023) | 35 |
Total SG&A | 45 | ||
Section 987 net income | 475 |
COGS Adjustments.
Adjustment for cost recovery deductions.
Depreciation amount | Historic rate | 2023 yearly avg. rate | Difference in translation rates | Adjustment (depreciation * change in rates) |
¬10 (building) | 1.00 | 3.50 | (2.50) | ($25) |
¬30 (machine) | 1.00 | 3.50 | (2.50) | (75) |
Total adjustment for cost recovery deductions | (100) |
Adjustment for LIFO liquidation.
LIFO liquidation layer | Historic rate | 2023 yearly avg. rate | Difference in translation rates | Adjustment (liquidated layer * change in rates) |
¬10.80 (2022) | 2.50 | 3.50 | (1.00) | ($10.80) |
¬10 (2021) | 1.50 | 3.50 | (2.00) | (20.00) |
Total adjustment for liquidation of LIFO layers | (30.80) |
OFCNV-End of 2023
Assets | Amount in ¬ | Translation rate | Amount in $ |
Euros | 422 | ¬1 = $4.00 (year-end spot rate-2023) | 1,688 |
Building | 720 | ¬1 = $1.00 (historic rate-2020) | 720 |
Machine | 210 | ¬1 = $1.00 (historic rate-2020) | 210 |
Inventory | 30 | ¬1 = $1.50 (historic rate-2021) | 45 |
Total assets | 2,663 | ||
Liabilities: | |||
Total liabilities | 0 | ||
2023 ending OFCNV | 2,663 |
2023 ending OFCNV | $2,663 |
Less: 2022 ending OFCNV | (1,847) |
Change in OFCNV | 816 |
Change in OFCNV | $816 |
Less: section 987 taxable income | (475) |
Unrecognized section 987 gain 2023 | 341 |
Plus: net accumulated unrecognized section 987 gain from prior years | 340 |
Net unrecognized section 987 gain | 681 |
26 C.F.R. §1.987-4