Companies with international operations will have assets and liabilities, income and expenses in foreign currency. However, since the investors of the country of origin and the entire financial community are interested in the value of the state currency (HC), the foreign currency balance sheet account and the income statement must be assigned an HC value. In particular, the financial statements of MNC overseas subsidiaries must be spelled out from local currency to domestic currency before being consolidated with the parent’s financial statements.

If the value of the currency changes, foreign exchange translation gains or losses may occur. Assets and liabilities spelled out at the current exchange rate (post-change) are considered exposed; translatable at the historical exchange rate (before the change) will retain its historical HC value and, accordingly, be considered unexposed.

Translational exposure is simply the difference between an exposed asset and an exposed liability. Controversy among accountants centers on where assets and liabilities are exposed and when the exchange rate difference gains and losses obtained by accounting should be recognized (reported in the income statement). An important point to be aware of in putting this controversy in perspective is that the gains or losses are accounting—that is, there is no cash flow involved.

Four main translation methods are available: current/non-current method, monetary/nonmoneter method, temporal method, and current rate method. In practice there are also variations of each method.

Temporary Method

The temporal method appears to be a modified version of the monetary/nonmoneter method. The only difference is that under the monetary/nonmonetary method, inventory is always translated at a historical level. Under the temporal method, inventory is usually translated at the historical rate, but it can be translated at the current rate if it is displayed on the balance sheet at market value. Despite the similarities, the theoretical basis of the two

Metode is different. The choice of exchange rates for translation is based on the type of asset or liability in the monetary/nonmonetary method; In the temporal method, it is based on an underlying approach to evaluating costs (historical versus market). Under the history of cost accounting systems, as the United States has now, most accounting theorists would probably argue that the temporal method is the right method for translation. The posts of the income statement are usually transliterated at the average rate for the reporting period. However, cost of goods sold and depreciation and amortization costs related to the balance of sheet items recorded at past prices are translatable at historical rates.

Current Tariff Method

The current rate method is the simplest: All balance sheet and income posts are translated at the current rate. This method is widely used by British companies. With some variations, this is the method mandated by the current U.S. translation standard—FASB 52. Based on the current method of the exchange rate, if the company’s foreign currency assets exceed the obligations in foreign currency, devaluation should result in losses and revaluation should result in a profit.

Source:

  • Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management. John Wiley & Sons.
  • Kuo, W. (2019). International financial management.

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