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CALIFORNIA STATE UNIVERSITY, NORTHRIDGE
TRANSLATION OF FOREIGN CURRENCY
FINANCIAL STATEMENTS
A thesis submitted in partial satisfaction of the
requirements for the degree of Master of Science in
Business Administration
by
Shahrooz Abootalebi
August, 1979
The Thesis of Shahrooz Abootalebi is approved:
Pr~ond
S. Chen
Committee Chairman
California State University, Northridge
ii
CONTENTS
Chapter
Page
Abstract
I.
II.
III.
IV.
V.
-
v
INTRODUCTION
1
THE DEVELOPMENT OF FOREIGN CURRENCY
TRANSLATION . . . . . .
4
Historical Review . . .
Official Pronouncements
4
8
TRANSLATION OF FOREIGN ENTITY FINANCIAL
STATEMENTS . . . . . . . .
11
Reasons for Translation
Translation Criteria . . . . . . . .
Selection of an Appropriate Exchange Rate
11
14
18
TRANSLATION OF FOREIGN ENTITY INDIVIDUAL
BALANCE SHEET AND INCOME STATEMENT ACCOUNTS.
23
Cash . . . . . . . . . . .
Accounts Receivable . . .
Inventory and Fixed Assets
Liabilities - Current
Liabilities - Long Term
Revenues and Expenses
23
24
25
25
26
28
TRANSLATION METHODS AND THEIR APPLICATIONS
30
Current - Noncurrent Method
Monetary - Nonmonetary Method
Temporal Method . . . . . . .
Current Rate Method . . . . . .
Appropriate Method of Translation
Exchange Adjustment
. . . . . . .
.
Application of Different Translation Methods
31
32
33
36
37
41
48
iii
Chapter
VI.
SUMMARY AND CONCLUSION
83
Summary . .
Conclusion
83
88
Bibliography . . .
90
iv
ABSTRACT
TRANSLATION OF FOREIGN CURRENCY
FINANCIAL STATEMENT
by
Shahrooz Abootalebi
Master of Science in Business Administration
August, 1979
The ever increasing number of organizations with international operations, and the necessity of accumulating
financial information about the entire business controlled
and operated· by this type of enterprise, introduces a
unique problem:
translation of financial statements of
foreign subsidiaries.
The problem of translation is magni-.
fied by the diversity of accounting standards and methods
currently in use throughout the world.
The Financial
Accounting Standards Board (FASB), currently the most
authoritative rule-making body of the accounting profession in the United States, issued Statement No. 8 in an
attampt to set accounting standards for foreign currency
translation.
The investors in multinational organizations
need a more realistic representation of foreign earnings
v
capacity than that provided by the temporal method of
accounting for foreign currency translation proposed by
the FASB.
The temporal method presents a serious problem
for investors in that it ignores the financial relationships as they exist in foreign environments.
The primary
objective and the purpose of this thesis is to search for,
investigate, and develop a useful method of translation of
foreign currency financial statements for use by investors
and to illustrate the application of this method.
The
proposed method, while not an absolute or perfect translation method under all circumstances, is the most theoretically sound of the currently available methods for use by
investors because it recognizes and maintains the financial relationships as they exist in foreign environments.
Chapter I of this thesis introduces the problem of foreign currency translation.
Chapter I I traces the histor-
ical development of the problem of accounting for foreign
currency translation and the development of the research
findings and pronouncements which have attempted to deal
with this problem.
Chapters III and IV discuss the trans-
lation of foreign entity financial statements and individual balance sheet and income statement accounts in order
to provide a framework from which to analyze and examine
the application of various translation methods.
Chapter V
contains an analysis of and application of various translation methods, such as the temporal method, the monetary-
vi
nonmonetary method, the current - noncurrent method, and
the current rate method.
To illustrate the application,
the consolidated financial statements of an hypothetical
multinational company, operating through its parent in the
U.S. and its subsidiary in Iran are translated.
Finally,
Chapter VI summarizes the analysis of the various issues in
accounting for foreign currency translation, and concludes
with a recommendation for the use of the current rate
method of translation.
It is proposed as a more realistic
method than that currently recognized by the Financial
Accounting Standards Board.
vii
CHAPTER I
INTRODUCTION
The problem of accounting in a multinational enterprise operating through its parent company in one country,
and its branches and subsidiaries in other countries, is
created by the employment of different monetary units in
different countries.
This problem is magnified by the use
of diverse accounting procedures for transactions in different currencies where there is not a continuing stable
relationship between the currencies.
Due to the slowly changing currency rate among
industrial countries,prior to World War II, accounting for
foreign currency translations did not receive significant
attention.
Only in recent years, after severe and some-
times frequent declines in the currencies of many nations,
such as the English Pound Sterling in 1949, 1952, and
1967, and especially after significant changes in the world
monetary system affected by the U.S. dollar devaluations
of 1971 and 1973, has the accounting problem involved with
foreign currency translation been given serious attention.
1
2
In translating and consolidating the result of foreign
operations into the parent company operations, there are
three basic problem areas which will be discussed throughout this thesis.
These problems include the determination
of an appropriate exchange rate, the selection of appropriate methods of translation, and the treatment of exchange adjustment.
In attempting to solve these problems, careful consideration should be given to the concept and the fundamen-·
tal objectives underlying the translation for the specific
users, for whom the financial statements are being prepared.
For investors who invest their equity in foreign operations, the fundamental criteria for selecting a translation procedure would be the one which most helps them in
making realistic decisions about whether to increase, decrease, maintain, or withdraw their investment at the
appropriate time, while assuming minimal risk.
According-
ly, for this group measurement risks and depicting the
realistic picture of operations as they exist in a foreign
environment would be the most pertinent criteria.
In determining the most appropriate method of translation for consolidation purposes, it is assumed that consolidated statements will give more meaningful results
than separate statements.
There are of course cases where inclusion of the
3
financial statements of foreign subsidiaries in consolidated financial statements would be meaningless and even
misleading.
For example, there are situations when the
foreign country which the subsidiary is located imposes restrictions on withdrawals of capital or transmission of
earnings in order to eliminate the rapid movement or
flight of capital.
Or, the foreign country may adopt ex-
change control techniques in an attempt to preserve some
degree of balance in its international payments.
These restrictions on the movement of capital or remittance of current earnings do not necessarily preclude
the inclusion of foreign subsidiary financial statements in
the consolidated statements.
However, if the effect of
these restrictions is very extreme, or if it imposes a
substantial impediment on the parent company's authority in
the administration of the foreign subsidiary's earnings,
then exclusion of the foreign subsidiary financial statements from the consolidated financial statements would be
justifiable.
The absence of trade or lack of other forms
of financial communication, or the existence of situations
in which the parent company cannot attach any value of its
investment in the subsidiary, can also be considered a condition under which inclusion of foreign subsidiary's financial statements in the consolidated statements would be
inappropriate.
CHAPTER II
THE DEVELOPMENT OF FOREIGN CURRENCY TRANSLATION
Historical Reviews
The development of foreign currency translation can
be traced to World War II.
As previously mentioned, due
to the slowly changing currency rates among countries,
prior to World War II, the accounting for foreign currency
translation did not receive adequate attention.
During
that period, the only pertinent writings in the U.S. were
published in 1931 1 and in 1934 2 by a special committee on
accounting procedures of the American Institute of Certified Public Accountants.
During World War II, the American Institute of Certified Public Accountants (AICPA) issued Accounting Research
Bulletin (ARB) No. 4, "Foreign Operations and Foreign
Exchange."
In 1949, because of the worldwide devaluation
1American Institute of Certified Public Accountants.
"Foreign Exchange Losses." Bulletin of the American Institute of Certified Public Accountants No. 92. (New York:
AICPA, December 1931), pp. 1-3.
2American Institute of Certified Public Accountants.
"Memorandum on Accounting for Foreign Exchange Gains."
Bulletin of the American Institute of Certified Public Accountants No. 117. (New York: .AICPA, January, 1934),
pp. 5-7.
4
5
of currencies of many countries, the AICPA published a
discussion memorandum regarding the effects of the devaluations on accounting in foreign currency translation.
In
1953, the AICPA issued Accounting Research Bulletin (ARB)
No. 43, which in Chapter 12 combined ARB No. 4 and the
AICPA discussion memorandum, accounting for devaluation.
ARB No. 43 (Chapter 12) basically supports the current noncurrent method as an appropriate method for translation
of the financial statements of foreign subsidiaries.
ARB
No. 43 required the translation of current assets and
liabilities at the current rate and the translation of noncurrent assets and liabilities at the historical rate.
It
also indicated that exchange loss, realized exchange gain,
and unrealized exchange gain, to the extent which offsets
the previous exchange loss, should be included in the
income statement.
In 1956, Professor Hepworth introduced a new method
of translation called the monetary- nonmonetary method. 3
Under this approach, monetary assets and liabilities were
translated at the current rate and nonmonetary assets and
liabilities were translated at the historical rate.
In
addition, he indicated that realized and unrealized exchange gain and loss should be immediately recognized in
3
.
Samuel R. Hepworth, Reporting Foreign Operations.
Michigan Business Studies, Vol. 12, No. 5 (Ann Arbor:
University of Michigan, 1956).
6
the income statement.
Following Hepworth's systematic and analytical research on translation methods, the monetary - nonmonetary
method gained acceptance.
In 1969, the National Associa-
tion of Accountants in Research Report No. 36 supported the
monetary - nonmonetary method for translation of foreign
currency financial statements and rejected the current noncurrent method on the grounds that the latter method
was based solely on balance sheet classification and so
served no theoretically sound and relevant purpose. 4
Official acceptance of the monetary - nonmonetary
method was followed by the issuance of Accounting Principles Board (APB) Opinion No. 6 in 1965.
According to
Paragraph 18 of ABP No. 6, which modified ARB No. 43
(Ch. 12) translation of receivables and payables, including long-term receivables and payables at the current
rate, was considered to be the most appropriate method of
translation.
After devaluation of the English Pound Sterling in
1967 the Institute of Chartered Accountants in England and
Wales issued Statement No. 25 which indicated that under
normal circumstances both the use of the
hist~rical
rate
4National Association of Accountants. "Management
Accounting Problems in Foreign Operations," NAA Research
Report No. 36.
(New York: NAA, 1969), p. 1 .
7
and the closing rate were acceptable. 5
The Institute of Chartered Accountants of Scotland in
a study published in 1970 indicated that the only acceptable method was the current rate method, and therefore,
translating balance sheet accounts at the historical rate
.
d.6
was reJecte
The Canadian Institute's Accounting and Auditing
Research Conrrnittee gave no official indication as to the
preferred translation method of assets and liabilities of
foreign subsidiaries except in the recent publication of
research study by Parkinson. 7
In 1971 the APB issued an exposure draft which required companies using the monetary - nonmonetary method
to defer exchange gain or loss to the extent that they did
not exceed these gains or losses attributable to long5 Institute of Chartered Accountant in England and
Wales, Members' Handbook. Statement N 25. (17 February
1968), paragraph 14.
6 Institute of Chartered Accountants of Scotland,
Research and Publications Committee, "The Treatment in
Company Accounts of Changes in the Exchange Rates of
International Currencies--A Scottish Institute Research
Study." The Accountant's Magazine, (September 1970),
appendix, paragraph 8.
7MacDonald R. Parkinson, Translation of Foreign
Currencies. (Toronto: Canadian Institute of Chartered
Accountants, 1972).
8
term debts. 8
However, since the U.S. dollar was devalued
at that time, the APB deferred action on the exposure
draft.
In 1972 Lorensen introduced a new method of translation in Accounting Research Study No. 12 called the
temporal method. 9 Under this approach, all assets and
liabilities were translated based on their measurement
basis.
He also indicated that all exchange adjustments
should be immediately included in the income statement.
Additional pronouncements which were directly or indirectly related to the translation problem, one was APB
22, Paragraph 13 which indicated the disclosure of
accounting policies in the translation of foreign currencies and another was APB No. 9, Paragraph 21 which
indicated the conditions under which exchange adjustments
could be considered to be extraordinary items.
Official Pronouncements
Because of major U.S. dollar devaluations in 1971 and
1973, the Financial Accounting Standards Board considered
the problem of foreign currency translation an important
8American Institute of Certified Public Accountants.
Accounting Principles Board, Exposure Draft; Proposed APB
Opinion, Translating Foreign Operations. (New York: AICPA,
20 December 1971).
9Leonard Lorensen. "Reporting Foreign Operation of
U.S. Companies in U.S. Dollars:' Accounting Research Study
No. 12. (New York: AICPA, 1972).
9
issue, and in April of 1973 it placed accounting for
foreign currency translation on its technical agenda.
In October 1973 the FASB issues an exposure draft of
a proposed FASB statement on the disclosure of Foreign
Currency Translation Information, and in December 1973 the
board issued FASB Statement No. 1, "Disclosure of Foreign
Currency Translation Information."
On February 21, 1974, the board issued the Discussion
Memorandum, "Accounting for Foreign Currency Translation,"
and held a public hearing on this subject.
Finally in
October 1975 the board issued FASB No. 8, "Accounting for
the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements," which is considered an
official pronouncement.
Paragraph 2 of FASB No. 8 declares in part:
This statement establishes standards of
financial accounting and reporting for foreign
currency transactions in financial statements
of a reporting enterprise. It also establishes
standards of financial accounting and reporting
for translating foreign currency financial statement incorporated in the financial statements
of an enterprise by consolidation, I8mbination,
or the equity method of accounting.
Paragraph 4 of FASB No. 8 states:
1 °Financial Accounting Standards Board, "Accounting
for the Translation of Foreign Currency Transactions and
Foreign Currency Financial Statements," Statement of
Financial Accountinf Standards No. 8, (Stanford, Conn:
Author October 1975 , paragraph 2
10
This Statement supersedes paragraphs 7 and
10 - 22 of Chapter 12, "Foreign Operations and
Foreign Exchange," of ARB No. 43; paragraph 18
of APB Opinion No. 6, "Status of Accounting .
Research Bulletins;" and FASB Statement No. 1
"Disclosure of Foreign Currency Translation
Information." It also amends the last sentence
of paragraph 5 of ARB No. 43, Chapter 12, to
delete "and they should be reserved against
to the.extent that their realization in dollars
appears to be doubtful," and paragraph 13 of
APB Opinion No. 22, "Disclosure of Accounting
Policies," to delete "translation of foreign
currencies" as an example of disclosure "commonly
required with respect to accounting policies."ll
Since its issuance, FASB No. 8 has been criticized by
members of the accounting profession, and is by far the
most controversial issue addressed in the Boards fiveyear history.
The magnitude of these criticisms from the
accounting profession and other economic and financial
groups finally reached its zenith when, at the January 31,
1979 FASB meeting, professional consensus forced the Board
to formally schedule FASB No. 8 on its agenda for additional consideration.
11 Ibid., paragraph 4.
CHAPTER III
TRANSLATION OF FOREIGN ENTITY FINANCIAL STATEMENTS
Reasons for Translation
Before indicating the reasons for translation, it is
important to define the term "translation," and the
difference between
th~t
term and the term "conversion,"
which is often used synonymously.
According to FASB No. 8, the phrases "foreign currency
translation" and "conversion" are defined as:
Foreign Currency Translation: The
process of expressing amounts denominated
or measured in one currency in terms of
another currency by use of the e!change
rate between the two currencies.
Conversion: The exchange of one
currency for another. 2
Conversion basically deals with the physical exchange
of different currencies.
For example, if an Iranian
visitor in the U.S. wishes to shop for or to order some
American goods, he would physically convert his own rials
1 Financial Accounting Standard Board, "Accounting for
the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements," Statement of Financial Accounting Standards, No. 8, (Stamford, Conn: Author
October 1975), Appendix E.
2
Ibid.
11
12
to American dollars, whereas in translation, there is no
physical exchange of currency.
It is merely restating the
currency of one country into the denominations of the
other.
Therefore, for purposes of translating the finan-
cial statements of a foreign entity, the emphasis needs to
be placed on term translation only.
To obtain meaningful results from the operations of
their subsidiaries abroad, management must prepare consolidated financial statements based on a single currency,
thereby enabling them to present the results of the
company as a whole, in a language understandable to the
financial community, stockholders, creditors, government,
and others.
In order to evaluate its investments and to exercise
operational and administrative control over its subsidiaries, the parent company requires information pertaining to
its foreign subsidiaries to be translated into the parent
company 1 s currency.
Additionally, it requires this trans-
lation for independent managerial decision making and for
combination with the parent company's information for use
by outsiders.
The National Association of Accountants indicates the
following reasons for translation:
1.
Since the U.S. parent company's investment
is in dollars, the operations of the foreign
subsidiary must be expressed in dollars in
order to evaluate the return produced by
the dollar investment.
13
2.
Management in the United States is accustomed
to thinking in terms of dollars rather than
in foreign currency units.
3.
The objective of business operations abroad
is profit which benefits shareholders of the
U.S. parent company through dividends paid in
U.S. dollars or through an increase in dollar
values of the U.S. shareholders' equity.
Translation of local currency to dollars is
a prerequisite to determining the periodic
gain or loss sustained by the U.S. parent
company from movements in exchange rates.
This figure measures the degree of success
which management has had in protecting the
U.S. company's dollar investment against
erosion from currency depreciation.
4.
In order to consolidate foreign financial
statements with domestic statements, all
the statements to be consolidated must
first be expressed in homogeneous monetary
units.3
FABS No. 8 indicates:
The need to translate foreign statements
arises because an enterprise's financial
statement cannot be prepared in dollars
directly from accounting records kept in
a different currency.4
Hepworth cites the reason for translation to be:
.... that of achieving an expression of the
financial position and operating results
of the foreign subsidiary in the same
monetary units in which the accounts
of the parent enterprise are expressed.
Underlying this is the more fundamental
objective of achieving a manner of
expression of the financial data of
foreign subsidiaries which will create
3National Association of Accountants, "Management
Accounting Problems in Foreign Operations," NAA Research
Report No. 36, (New York: NBA, 1960), pp. 10-ll.
4FASB No. 8, Paragraph 75.
14
a maximum degree of understanding such
data on the part of the manager, creditors,
and sto~kho5ders of the domestic parent
enterpr~se.
The author of this thesis objects to the use of the
parent company's monetary units as the basis for translation.
The reasons for this objection are analyzed in the
discussion on the appropriate unit of measurement in this
chapter.
Translation Criteria
One of the most important objectives in the preparation of financial statements is to present a fair and
meaningful picture of the results of operations of the
accounting entity in order to enable outsiders and other
interested parties to make logical and informed decisions.
Only in compliance with this vital precept can one develop
translation criteria which will enhance the usefulness of
consolidated financial statements.
The first element to consider is that the foreign
subsidiary's financial statements are the product of activities and operations which are conducted in a completely
alien situation with dissimilar economic, social and legal
environments.
Therefore, in order to report meaningful
information in consolidated financial statements, the main
5 samuel R. Hepworth, Reporting Foreign Operations,
Michigan Business Studies, Vol. 12, No. 5 (Ann Arbor:
University of Michigan, 1956), p. 1.
15
objective would be to preserve the situation resulting
from the foreign environment and accordingly to maintain
the local currency unit as the measurement basis in the
translated financial statement.
Contrary to this approach,
(which suggests the local perspective for translation of
the financial statement) Professor Hepworth supported the
parent perspective and indicated that the objective of
translation should be to achieve an expression of the
financial position and operating results of the foreign
subsidiary in the same monetary units in which the accounts
of the parent's enterprise are expressed.
In the author's opinion, Professor Hepworth's
criterion for translation can be criticized as unrealistic
and unjustifiable.
Since the fundamental objective of
financial statements is to provide useful information to
interested parties in order to assist them in making accurate decisions, it is elementary and naive to ignore the
economic and social effects of a foreign environment in
the financial statements of major subsidiary and to present
consolidated financial statements based on the assumption
that the operation of a foreign subsidiary is being conducted in the parent's country, and therefore utilizing
the parent company's currency as a meas11rement unit for
consolidated financial statements.
A political and economic revolution which recently
developed in Iran disrupted the monetary system and
16
caused a tremendous impact on major international corporations operating in that country; yesterday's windfall
operation suddenly reverted to a very unstable and fluctuating situation with a completely unforeseeable position
ahead.
With this situation in Iran, or in general with
all unstable economic and social situations all over the
world, it is rather doubtful that one can ignore these
facts and prepare consolidated financial statements based
only on the parent company's measurement unit and still
relate accurate and useful information from these consolidated financial statements.
The Exposure Draft by the Accounting Standards Committee of the
Au~tralian
Society of Accountants supports the
local perspective in translation of foreign financial
statements.
It indicates that:
The object of translating the accounts of an
Australian company's foreign-based operation is
to enable their incorporation into the company's
accounts or group accounts at an Australian dollar
equivalent that fairly presents, from the Australian
viewpoint, the results and financial position of
that foreign-based operation in a way which is
helpful to the users of the Australian financial
statements.
The use of historic rates for this purpose
rests on the view that foreign-based operations
are simply distant extensions of the home
company, thus, requiring accounts of such operation to be maintained in terms of Australian
dollars. All transactions are, therefore,
translated at historic rates. As a result the
Australian accounts reflect the historical
costs of those transactions as if they had
taken place in Australia, using Australian
dollars.
17
However, the above view ignores the
underlying fact that the foreign-based
operation is a separate business unit,
and its transactions are carried out in
a foreign currency. That foreign currency
is the measuring unit of the operation's
financial position and performance, and
its financial statements are expressed in
that foreign currency in accordance with
the laws of the country of domicile.6
Regarding the local perspective, Parkinson indicates:
The only basic factrual financial statements for a business operation in a foreign
currency are those which are expressed in
the currency units of that foreign country.7
Another criterion which plays a significant role in
the translation of financial statements of a foreign subsidiary is that the local accounting principles of a foreign entity should be preserved.
Again, in order to
obtain the most productive information and results from
consolidated financial statements, and in order to obtain
an appropriate picture of foreign operations, the accounting principles of that foreign country which best portray
its legal requirements, tax incentive, availability of raw
material and manpower, and other unique factors, should be
sustained in the translation process.
urrenc~es.
l0-12.
, paragrap s
7MacDonald R. Parkinson, Translation of Foreign
Currencies. (Toronto: Canadian Institute of Chartered
Accountants, 1972), p. 66.
18
Selection of an Appropriate Exchange
R~te
The translation of foreign financial statements into
the parent company's currency is, by itself, a very complex
matter which requires great expertise and judgment to
obtain a meaningful result.
This difficulty is further
complicated by the employment of the different exchange
rates which exist in today's markets.
In this section,
most of the exchange rates which are widely used in the
translation of foreign financial statements will be analized.
Due to the great fluctuation of exchange rates (a
characteristic of many countries' currencies in recent
years), the most important criterion in determining the
representative exchange rate would be to select that exchange rate which will provide the most meaningful results
for the period chosen.
Before commencement of any discussion of different
types of exchange rates, it is necessary to mention some
important factors which influence the fluctuations of exchange rates.
In today's market, the fluctuation of exchange rates
can arise from inflation (which exists among different
nations' money market variations), capital investment
levels, and the balance-of-payments disequilibrium.
19
The significance of an individual country's balance of
payment in the fluctuation of exchange rates is discussed
in the following quotation:
The fundamental determinant of the
supply/demand relationships among currencies
is, of course, longer run developments in the
balance of payments of individual countries,
particularly the major trading nations. A
basic balance of payments disequilibrium,
whether it takes the form of persistent
surpluses or deficits, inevitably leads to
pressures resulting in parity changes in the
form of revaluations or devaluations. Such a
disequilibrium can result from numerous sources.
These include, to name only a very few, interest
rate differentials, the loss of a key export
market, changes in the propensity to import,
the existence of differential rates of inflation
among the key trading nations, a desire to
invest heavily abroad, foreign military commitments and aid programs, and tariff and non-tariff
restrictions on trade. Of these causes, the
most basic is the development of differential
rates of inflation among a group of trading
partners. If prolonged, such a development
will invariably erode the competitive. position
of the country or countries with the most rapid
rate of inflation. Exchange rate (parity)
changes arg certain to flow from such a
situation.
Political and social factors also can be cited as
determining agents in the exchange rates.
Another major
factor of change is called "extrapolated expectations,"
which basically means that if the speculators think that
the specific currency will be revalued in the future,
they will exercise an unusual demand for that particular
currency.
This action will actually result in a
8
chemical Bank, Forei~n Exchange Exposure Management.
(New York: Chemical Bank, 972), p. 4.
20
revaluation of that currency and so effect the exchange
rate.
The existence of different international exchange
rates creates an additional problem in the translation of
foreign financial statements.
Some examples of different
types of exchange rates include selling rates, buying
ratesr. spot rates, forward rates, official rates, free
market rates, standard bookkeeping rates, dividend remittance rates, penalty and preference rates.
Spot rates are those which are quoted by traders in
foreign currency exchange departments of international
banking sectors of the major commercial banks in each
country.
These quoted rates can be either the buying or
selling rate.
The difference between these two rates
determined the gross
prof~t
to the traders' operation.
In translating financial statements, the use of buying rate is extensively supported by Leonard Lorensen in
ARS No. 12.
He indicates that only the buying rate is
appropriate for
translat~on
and that translation of some
accounts at the buying rate and others at the selling rate
will result in reporting exchange gain and loss.
Use of standard bookkeeping rate, or the average of
the buying and selling rates, is supported by MacDonald
Parkinson in the Canadian research study.
This rate
basically approximates the actual exchange rate.
A Canadian study in this area states:
21
As a general rule, the accounts of a
foreign subsidiary should be translated to
Canadian currency at bookkeeping rates of
exchange which need only approximate actual
rates for converting the foreign currency.
Once established, a bookkeeping rate should not
be changed until, because of changes in actual
exchange rates, it becomes clearly inappropriate;
a new translation rate should be selected as
soon as practical after a currency revaluatio~,
as distinct from a mere currency fluctuation.
It should be indicated that selecting this rate gives rise
to some problems such as selection of the specific point in
time at which the bookkeeping rate should be changed and
the specific criteria used for altering this rate.
Another problem is whether the standard bookkeeping rate
should be determined by using an average of the daily,
weekly or monthly closing rates or by using some other
method.
The import and export rates, or preference and penalty
rates, are determined by individual countries in their
specific import-export transactions.
For example, if the
government of a country has a preference for importing
certain goods, or if it wants to discourage exporting
certain other goods, it may control the rate by imposing a
preference rate or penalty rate which would increase the
value of the local currency in comparison with the currency
of another country.
Another rate is the forward market rate, which is the
9Parkinson, op. cit., p. 26.
~l
22
rate used in transactions consummated at a future date to
allow an enterprise to hedge against fluctuations in spot
rates.
At present, two exchange rates, the free rate and the
official rate, are predominately applied.
The free rate,
which is based on the theory of supply and demand, treats
the fluctuation of currency as an economic commodity or as
a money market instrument.
The official rate or controlled
rate is imposed by the governments of individual countries.
The fundamental objective and criterion in determining
the appropriate current rate is to reflect the factual and
economic reality of the result of the foreign subsidiaries'
operations.
To achieve this criterion, the author believes
that the exchange rate, which is applicable to dividend remittances, fulfills this objective best and must be selected
as the appropriate current rate.
'
_._-
-
.:.... ______
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CHAPTER IV
TRANSLATING OF FOREIGN ENTITY INDIVIDUAL
BALANCE SHEET AND INCOME STATEMENT ACCOUNTS
The different translation method and their practical
applications are reviewed in detail in Chapter V.
The pur-
pose of Chapter IV is to analyze and discuss the translation of individual balance sheets and income statement
accounts, thereby preparing a basis for the justification
and understanding of selecting and supporting the appropriate method of translation.
In order to simplify the
discussion, the existence of multiple exchange rates will
be ignored, and only the current rate or historical rate
will enter into the discussion.
Cash
It has been accepted by both those who propose and
those who oppose using the current rate and historical
rate for translation, that cash or other items close to it,
such as bank acceptances (which represent the very
essence of a money-value item) should be translated at the
current rate of exchange.
23
24
Accounts Receivable
The translation of accounts receivable at the current
rate presents little difficulty, and generally, using the
current rate for translation of these items is accepted by
advocates of different translation methods.
The use of
the current rate is based on the theory that accounts receivable represent assets which fit into the category of a
monetary item, and therefore, as with the cash item, they
should be translated at the current rate.
The allowances
for uncollectable accounts 'receivable also should be translated at the current rate in order to obtain net realizable
value of these accounts in terms of dollars.
FASB No. 8, paragraph 11, states:
In preparing foreign statements, balances
representing cash and amounts receivable or
payable that are denominated in other than the
local currency shall be adjusted to reflect
the current rate between the local and the
foreign currency. Those adjusted balances
and other balances representing cash and
amounts receivable or payable that are
denominated in the local currency shall be 1
translated into dollars at the current rate.
1 Financial Accounting Standards Board, "Accounting
for Translation of Foreign Currency Transactions and Foreign Currency Financial Statements," Statement of Financial Accounting Standards No. 8 (Stamford, Conn: Author
October 1975), paragraph 11.
25
Inventory and Fixed Assets
Since the inventories of a foreign subsidiary are the
assets of that entity, and since they are located in a
different environment, the accounting standards and principles of that specific foreign country determine the
criteria for valuation of these inventories.
The transla-
tion process should not adjust the value of these inventories in order to satisfy the valuation principles and
standards. of the parent enterprise.
Accordingly, to
preserve the valuation principle of the local country, and
to prevent the revaluationof these items in the parent
company, in translating inventory the current rate which
represents only the mathematical and absolute revision in
the exchange unites for two different currencies should be
used.
The same reasoning and principles should be applied
to fixed assets, since for accounting purposes, fixed
assets and inventory are similar in nature.
Liabilities - Current
Both the supporters and the opponents of the different
method of translation agree that accounts payable (shortterm) should be translated at the current rate, since short-
26
term liabilities, like accounts receivable, fall into the
category of a money-value item.
One theory is that the
logical translation rate for a liability is that rate in
effect when the liability will be paid.
However, due to
uncertainty in predicting exchange rates for the future
(because of high fluctuation in exchange rates), the
future exchange rate method has gained little acceptance.
Liabilities - Long-Term
Except in the current-noncurrent method in which longterm liabilities are translated at the historical rate,
these balance sheet items are translated at the current
rate using various translation methods.
These balance sheet accounts, like other liabilities,
fall into the category of money-value items, and therefore, they should be translated at the current rate without regard to the maturity date.
If these long-term
liabilities consist of bonds, then the present value of a
bond, (measured by deducting the face value of the bond
from its unamortized premium or discount), should be tranlated at the current rate.
A special conunittee on accounting procedure of the
American Institute of Accountants in their memorandum in
1931 advocates using the historical rate for long-term
liabilities.
It states:
27
Long-term liabilities should not be
converted at the closing rate, but at the
rate of exchange prevailing when the
liability was actually contracted. This
is a general rule, but exceptions might
exist in particular cases: for example,
where there are assets receivable over a
term of years, which are converted at the
current rate, particularly where such
assets could be applied to the 2
retirement of such liabilities.
Recognition of the historical exchange rate for longterm liabilities was made by ARB No. 4 and ARB No. 43,
Chapter 12 in 1953.
However, in the case of incurred debt
which is originated from acquiring fixed assets before the
devaluation of a currency, ARB No. 43 made an exception.
ARB No. 43, Chapter 12, paragraph 18 states:
In such instances it.may be appropriate
to state the long-term debt or the capital
stock of the new rate and proper to deal with
the exchange differences as an adjustment of
the cost of the assets acquired.3
Recent study of accounting publications indicates
that the use of the current rate for translation of longterm debt has been advocated in various accounting publications such as Research Report No. 36 by The National
Association of Accountants in 1960, APB Opinions No. 6,
the Institute of Chartered Accountants in England and
2American Institute of Certified Public Accountants,
Special Corrnnittee on Accounting Procedure, "Foreign Exchange Losses," Bulletin of the American Institute of
Certified Public Accountants, No. 92.
3ARB No. 43, Chapter 12, paragraph 18.
28
Wales Members' Handbook. Statement N 25, paragraph 6, and
by the Institute of Chartered Accountant of Scotland, "The
Treatment in Company Accounts of Changes in the Exchange
Rates of International Currencies," paragraph 48.
Using the current rate for this balance sheet item
was also recommended by Parkinson and Hepworth.
Lorensen
indicated that:
Translation of long-term debt should be
at the foreign exchange rate in effect at the
balance sheet date.4
Revenue and Expenses
In order to preserve the local currency as the unit
of measurement, and to satisfy the most fundamental
objective of translation (which is to retain the financial
relationships as they exist in foreign entity income
statements), the translation of revenues and expenses
should be at the current rate (the closing rate approach).
Professor Seidler states:
Profit should be that which resulted from
the transactions in terms of the dollars exchange values at the end of the year. Income
statements translated entirely at the closing
exchange would seem to present a more reasonable picture of earning capacity.
4 Leonard Lorensen, "Reporting Foreign Operations of
U.S. Companies in U.S. Dollars," Accounting Research Study
No. 12. (New York: AICPA, 1972), p. 18.
29
on the basis of the most currently available
information.S
5Lee J. Seidler, "An Income Approach to the Translation of Foreign Currency Financial Statements," The CPA
Journal (January 1972), p. 34.
- - - - - -.- - -
----·-
.
-----------
CHAPTER V
TRANSLATION METHODS AND THEIR APPLICATION
This chapter will be focused primarily on the selection of the appropriate method of translation and the
application of various translation methods to foreign
currency financial statements.
As indicated earlier, the primary objective of this
thesis is to select the most appropriate method of translation for foreign currency financial statements.
To ful-
fill this objective, several translation methods will be
discussed in this chapter then the local currency financial statements of the Iranian subsidiary of an hypothetical U.S. company will be translated into U.S. dollars
using each of these methods.
Four basic translation methods are frequently discussed in today's accounting literature.
These include
the current - noncurrent method, the monetary - nonmonetary method, the temporal method, and the current rate
method.
30
31
Current - Noncurrent Method
Based on this method, which was widely used after
World War II and supported by AICPA in Chapter 12 of its
Accounting Research Bulletin No. 43, current assets and
current liabilities are translated at the current rate
effective at the balance sheet date, and noncurrent assets
and liabilities are translated at the historical rate in
effect at the time these assets and liabilities were
recorded in the accounts.
Except for depreciation and amortization, revenue
and expenses accounts are translated at the weighted
average exchange rate.
Depreciation and amortization are
translated at the historical rates of the related assets.
Also, realized gain or loss and unrealized loss are
charged to the income statement currently, and realized
gain is charge to current operations to the extent that it
offsets any prior provision for unrealized losses.
The representation of the liquid aspects of the
financial position of a foreign operation is one of the
primary advantages of the current - noncurrent method,
since this method imposes intensive emphasis on the
current - noncurrent classification of assets and
liabilities.
32
This method, which has strong support among some
accountants outside the United States, suffer from theoretical shortcoming in selecting the balance sheet classification as a basis for determination of exchange rates, since
the classification of assets and liabilities does not
necessarily represent any relevancy to the attributes of
the individual assets and liabilities accounts.
There-
fore, selecting the exchange rate based on this classification does not fulfill any objectives, but rather it
represents a deception resulting from the names of
certain account classifications.
Monetary - Nonmonetary Method
The criterion used to determine the appropriate exchange rate for the translation of individual balance
sheet items under this method is based on the particular
characteristics of the items.
All monetary assets and
liabilities which are claims or obligations, such as
cash, accounts receivable, accounts payable and long-term
liabilities, are translated at the current rate prevailing
at the balance sheet date, and nonmonetary items such as
inventories and fixed assets are translated at their
historical rate.
This method was strongly recommended by Professor
Hepworth and it was further supported by the Accounting
Principles Board in APB Opinion No. 6, ARB No. 43, and
33
also by the National Association of Accountants.
This
method employs the characteristics of individual balance
sheet items as a conceptual basis for selecting the
appropriate exchange rate, which has little relevancy if
any to the objective of translation, and lacks adequate
theoretical justification necessary for selecting the
appropriate exchange rate in the translation of foreign
financial statements.
Temporal Method
This method was first introduced in Accounting
Research Study No. 12.
The method is based on the concept
that translation is only a restatement of a given value
or measurement conversion process; therefore, it should
not change the individual attributes of items included in
the translation.
The method, which was sanctioned by FASB No. 8 on
October 1975, is the most authoritative method of translation of financial statements of foreign subsidiaries.
Under this approach, the assets and liabilities are translated at the rate which retains the particular accounting
principle employed for their valuation.
Therefore, cash,
accounts and notes receivable, accounts and notes payable,
marketable securities carried at current market price,
and inventories carried at replacement or market price or
net realizable value are all translated at the current
34
rate prevailing at the balance sheet date.
Marketable
securities earned at cost, inventories carried at cost,
property, plants, equipment, and good will are all translated at the historical rate.
Under this approach,
revenue and expense items in the income statement are
translated at the average exchange rate, and exchange
gains or losses are immediately recognized and included in
income statements.
Although this method, in comparison with the currentnoncurrent method or the monetary - nonmonetary method,
has greater conceptual validity and is theoretically well
founded, it still suffers from an inadequate conceptual
framework.
The serious limitation inherent in the temporal
method is that, unreal exchange gains or losses are introduced during the translation process after the change in
exchange rates between the reporting and local currencies.
These unreal exchange gains or losses are a result of
the nature of the temporal method, which translates the
inventory and fixed assets at the historical rate and
the related long-term debt, to which the foreign subsidiary committed itself in order to acquire these inventories
or fixed assets, at the current rate, following devaluation of the local currency relative to reporting currency.
For example, when the local currency is devalued in comparison to the reporting currency under the temporal method,
35
the long-term debt would be translated at the current
rate, and the related asset for which this long-term debt
has been undertaken would be translated at the historical
rate--which is lower than the current rate.
Therefore,
translation of these comparable balance sheet items at
different rates would necessarily result in exchange gain,
which in reality does not have any basis for existence
since there is no cash flow in the subsidiary which can
justify this exchange gain.
The asset would be sufficient
only to cover that particular debt.
However, if the for-
eign subsidiary purchases the inventories and fixed assets
from another country on credit, the real exchange gain
will exist following the revaluation of the foreign subsidiary's currency in terms of the currency of the country
from which these assets have been purchased.
Conversely,
when the value of local currency is increased in relation
to the reporting currency, the translation of debt at the
current rate, which is lower than that of the historic
rate, and the
translation·~of
the related assets at the
historical rate will produce an exchange loss.
Again,
this loss does not have any basis for existence since the
cash flow from operation of these assets in the foreign
country will compensate for the related debt.
It is important to indicate that this unreal exchange loss would be offset in a later period by an
exchange gain, generated when the assets were finally
36
sold.
This is because the cost of the assets would be
translated at the higher rate, and the revenue resulting
from the sale would be translated at the lower rate
following the revaluation of the foreign local currency.
Similarily, the unreal exchange gain would be offset by an
exchange loss generated from a later period translation of
foreign subsidiary financial statements, since the cost of
the assets would be translated at the lower rate and revenue from the sale at the higher rate following devaluation of local currency.
In effect, the temporal method when a rate change
occurs between two currencies, by ignoring the relationships that exist betwen an individual asset and its related financed debt, or in other words, by mismatching the
effect of revaluation or devaluation on assets and related
debts, creates an artificial gain or loss, and then offsets this in the later period by over or under reporting
of the results of operations.
Consequently, this intro-
duces into the financial statements an inconsistant pattern
of reporting which is inappropriate in the accounting
profession.
Current Rate Method
This method was first supported by the Institute of
Chartered Accountants in England and Wales in 1968, and
by the Scottish Institute Research Study in 1970.
It has
37
had little if any acceptance in the United States.
Under
this method, all assets and liabilities are uniformly
translated at the current rate.
In the income statement,
the revenues and expenses are translated at the current
rate prevailing on the balance sheet date.
The fundamen-
tal criticisms which have been made about this approach
are:
(1)
the method introduces dual units of measurement
and accounting principles to the financial statements, and
(2)
it changes the historical cost principle of account-
ing.
Appropriate Method of Translation
As discussed earlier, the purpose of this thesis is
to study, analyze, and select the most valid and appropriate method of translation, and illustrate the application of various translation methods in real cases.
In order to select the more reliable translation
method, consideration should be given to the specific
users for whom the foreign financial statements are being
translated, as well as the concepts and fundamental
objectives which underly this translation.
In developing
the basic criteria and objectives, careful consideration
should be devoted to the purpose for which the accounts
are being translated.
For the hypothetical investors solely interested in
protecting their investment and gaining a reasonable
38
return on their invested capital, the purpose of translation is to convey useful information so they can make
decisions.
To provide useful data for investors, the underlying
objectives and criteria of translation should be developed
in a way which accurately reflect financial relationships
as they exist in foreign environments, as well as measure
the risks inherent in all aspects of foreign operations.
By focusing on only these objectives and criteria, the
results of foreign subsidiary operations can be presented
in a more meaningful and realistic approach which implies
less risk to the investors, thereby enabling them to
make accurate decisions regarding their investments
abroad.
By considering the above facts, the objectives of
translation can be stated as follows:
1.
To present the reality of results of operations
of foreign subsidiaries as they exist in the
foreign environment.
Since these operations are
being conducted in a foreign environment, the
only meaningful accounting principles are those
which have been applied in the valuation process
of assets and liabilities in that foreign country.
This translation process should not change or
have any adverse effect on these principles.
--
--·-
~-- ~-'-- ~ ~-
~-·
---
--
_.
--,..
39
2.
To consider the foreign currency as the unit of
measurement.
In translating foreign subsidiary financial statements, a method should be selected which will fulfill
these objectives and criteria.
Among the aforementioned translation methods, the
current - noncurrent method and the monetary - nonmonetary
method do not have a strong conceptual basis for selecting
the appropriate exchange rate for the different balance
sheet accounts.
They realize the measurement of risk for
some items, but ignore that risk measurement for others,
and therefore, do not satisfy the stated objectives of
translation.
The temporal method, due to its weakness in the
treatment of individual assets and the debt incurred to
acquire those assets, ignores the economic reality of
foreign operations and also violates the local currency
accounting principles, the primary objective of translation, and therefore is rejected as an appropriate method
of translation.
Analysis of the shortcomings of these translation
methods leads to the conclusion--that the current rate
method is the only one which fulfills the stated objectives of translation for use of the investors, since
under this method all assets and liabilities are uniformly
translated at one current rate.
The foreign currency
40
unit and accounting principles used in the foreign
country as a measurement basis for the assets and liabilities remain unchanged.
In response to those who claim that this method is a
departure from the historical-cost principle of accounting,
it should be emphasized that since the assets are maintained in the foreign environment, their historical-cost
basis exists only in the accounting records of the foreign subsidiary, and these assets do not have any cost
basis in the parent company's accounts.
The current rate
method does not change the historical-cost of these assets
in any way; it simply expresses and updates them in different unit amounts in the consolidated financial statements
in consideration of the change in the exchange rate.
The current rate method in addition to its simplicity,
recognizes the foreign currency as a unit of measurement
and therefore, realizes the financial relationships and
operating results as they exist in a foreign environment.
It is the only method that provides up-to-date and meaningful results for the investors, since it assesses the
true worth of their investment in the foreign subsidiary.
The advantages of the current rate method far outweigh
its shortcomings and it is recommended by the auther of
this thesis.
41
Exchange Adjustment
Fluctuation of exchange rates introduces another
challenging problem for accountants.
This problem which is
known as the translation adjustment or exchange gain or
loss, arises from the application of different exchange
rates in the translation of foreign subsidiary balance
sheet accounts, following devaluation or revaluation of
foreign currency in comparison with the reporting currency.
For purpose of translating the financial statements of
foreign subsidiary the term revaluation is defined as the
raising of the value of a currency in terms of other currencies and devaluation as the lowering of the value of
a currency in terms of other currencies.
The exchange adjustment is considered a gain if the ·
local currency is revalued in comparison with the reporting
currency and a net asset position exists in the foreign
subsidiary's balance sheet, or if the net fluctuation
amount in the asset section of the balance sheet exceeds
the net fluctuation amount in the liability section.
The
adjustment is also considered a gain if the local currency
is devalued in comparison with the reporting entity's
currency and a net liability position exists in the foreign subsidiary's balance sheet.
The exchange adjustment will be considered a loss if
42
the local currency has been revalued in comparison with
the reporting entity's currency and a net liability position exists in the foreign subsidiary's balance sheet.
Also, it would be a loss if the local currency has been devalued in comparison with the reporting entity's currency
and the net asset position exists in the foreign subsidiary's balance sheet.
The major unresolved issue facing accountants is the
treatment of these translation adjustments.
There is a
significant controversy among writers of accounting literature as to whether exchange adjustments should be considered a gain or loss, an adjustment to stockholder's equity,
an adjustment of the cost of nonmonetary assets, or an
adjustment of interest expense.
Also, if it is treated as
a gain or loss, should this gain or loss be recognized in
income immediately or should it be deferred to future
periods based upon specific criteria: realization, conservatism, the possibility of reversal of the exchange rate
change in the future, the effect on future income of the
exchange rate change.
Hepworth and Leonard Lorensen, who support consideration of the exchange adjustment as gain or loss, indicate
that since these fluctuations are part of the overall
operating result of the foreign entity, the reader of financial statements would be best served if this gain and
loss in income is immediately recognized.
43
The Financial Accounting Standards Board in its statement No. 8 indicates that:
Exchange gains and losses shall be
included in determining net income for the
period in which the rate changes. Exchange
gains and losses are gains and losses as
those terms are used in paragraph 15 (d) of
APB Opinion No. 28, "Interim Financial
Reporting", which states: "Gains and losses
that arise in any interim period similar to
those that would not be deferred at year end
should not be deferred to leter interim periods
within the same fiscal year."l
There is general opposition among writers of accounting literature to deferring exchange gain or loss based on
stated criteria.
The deferrment of exchange gain or loss
based on the criteria of realization can be criticized,
since translation is not actual conversion and distinction
between realized or unrealized gain or loss cannot be
definitive.
Conservatism, another criteria which justifies the
deferral of exchange gain or loss to future periods, is
also subject to criticism among some authors on the
grounds that the application of the concept of conservatism is permitted in accounting literature, in order to
defer the recognition of income to future periods when
there is not sufficient evidence to validate it.
However,
1 Financial Accounting Standard Board, "Accounting for
the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements," Statement of Financial Accounting Standards No. 8, (Stamford, Conn: Author,
October 1975), Paragraph 17.
44
in translating the financial statements of foreign subsidiaries, the manifest change in exhcnage rate which causes
the exchange gain or loss,provide definitive evidence;
therefore, the concept of conservatism is not applicable.
The possibility of reversal of the exchange rate
change in future periods is also considered to be a factor
to deferral of exchange gain or loss.
According to this
view, since the current direction·0.£ exchange rates could
be reversed at a later time, gains or losses should be
deferred to future periods and amortized over a period of
time not to exceed 40 years.
This position is based on
forecasting exchange rate changes, which are influenced by
many variable factors.
By utilizing tni·s criteria for
deferring of exchange gain or los.rs, the current operating
results of the foreign subsidiary could be misstated due to
the existing uncertainties in forecasting.
Lorensen states:
Recognition of foreign exchange gains and
losses should not be deferred under any
procedure. Deferral procedures require
either introducing into the balance sheet
anomalous "suspense accounts" that qualify
as neither assets nor liabilities or require
attributing to assets changes in liabilities
that affect neither the cost nor value of the
assets. A deferral procedure results in
reporting effects of exchange rate changes in
the balance sheet but omitting to report them
in the income statement. If a gain or loss
on foreign exchange occurs, it should be
reported consistently in both financial
statements. If it does not occur, the
balance sheet should not be made to report that
it did. Reporting a foreign exchange gain or
45
loss in one statement but not in the other
means that the gain or loss is both denied and
affirmed at the same time.
The effects of exchange rate changes
should be reported for both income statement
and balance sheet purposes in the periods
they occur. Deferral procedures result in
an artificial smoothing of net income
(because deferral must be arbitrary) that
lessens the value of the information to
financial statement readers.z
The effect on future earnings of the exchange rate
change is also considered to be a reason to deferral of
exchange gain and loss.
According to this approach, if
predictions show future earnings will reflect a favorable
change which could counterbalance present unfavorable translation adjustments, deferral is recommended.
However,
since the future effect of the exchange rate is uncertain,
this approach is also conceptually weak.
As mentioned earlier in this chapter, the translation
adjustment also can be considered as an adjustment to
stockholders 1 equity.
Since most foreign investments are
long-term or permanent, and since the exchange gain or loss
never becomes realized until the termination of operations
of the foreign entity, these exchange gains or losses
should not be included in the income statement at all.
They are said to indicate the increase or decrease of
wealth related to the foreign investment, and thus
2Lorensen, op. cit., pp. 60-61.
46
should be deferred permanently and adjusted to owners'
equity.
As previously indicated, the translation adjustment
can also be considered an adjustment of the cost of nonmonetary assets.
This approach suggests that the trans-
lation gain or loss should be deferred to the extent covered by the difference (gain or loss) resulting from translating nonmonetary items at a higher or lower current rate
rather than at the historical one (cover approach).
The
deferral of these covered gain or loss, and their amortization over the life of the related nonmonetary assets, is
considered to be the offset to the effect of the high or
heavy historical cost on the operations of future periods.
The principal criticism of this cover approach is
that the change in the value of liabilities is deferred to
be offset against the change in the future value of assets
recorded at cost.
Since- the change in the value of assets
should not be recognized until these assets are sold, offsetting under the cover approach does not seem to be
justifiable.
An adjustment of interest expense could be supported
as a way of treating the exchange gain or loss in foreign
financial statements.
Under this approach, when the net
liability position exists, the exchange gain or loss is
deferred to the extent of the amount associated with longterm liabilities.
This deferred exchange gain or loss is
47
then amortized over the remaining life of the long-term
liabilities.
FASB No. 8 states:
The Board considered the argument that
management assesses the likelihood of rate
changes and differences in interest rates between countries in deciding to borrow foreign
currency rather than dollars or one foreign
currency rather than another and that all or
part of the effect on long-term debt of a
rate change is, therefore, an added or reduced
cost of borrowing a particular foreign currency.
The Board does not deny that management may
assess borrowing alternatives in that manner. To
b~ consistent with that view, thought would require
interest accruals over the life of the borrowing
at the anticipated effective interest rate.
However, the Board concluded that it is inappropriate to attempt to account currently for the
expected effect of future rate changes on interest
and principal payments. The Board also concluded
that adjusting translated long-term debt by the
amount of the related exchange gain or loss at the
time of a rate change does not produce a result
consistent with the expected effective interest
rate at the date of the borrowing even if the
expectations about rate changes at the time of
borrowing are realized
Therefore, the Board
rejected the proposal. 4
In the author's opinion, the objective of translation
should determine the treatment of exchange adjustment.
As
cited earlier, the objective of translation is to preserve
financial relationships as they exist in the financial
statements of the foreign subsidiary by recognizing the
local currency as the unit of measurement and the local
accounting principles as the measurement basis for asset
4 FASB No. 8, paragraph 182.
48
valuation.
It is also reasoned that the only translation
method which recognizes these principles is the current
rate method, which translates all assets and liabilities
into one current rate.
When using current rate method, exchange adjustment
results from remeasuring the net worth of the beginning
period at a rate prevailing at balance sheet date rather
than rate of beginning period.
Therefore, this adjustment
should be reflected in the owner's equity section of .the
balance sheet rather than the income statement.
Including
this adjustment as gain or loss in the income statement
would introduce a new factor into the net profit reported
therein, and accordingly would distort the original financial relationship.
Application of Different Translation Method
To illustrate the translation and consolidation of
financial statements of the parent company and its foreign
subsidiary, assume that on December 31, 1977 Paramount
Corporation, located in.the United States, merged with
Salmaz Enterprise, domiciled in Iran, in a business combination accounted for as a pooling of interests.
Paramount
Corporation issued 4,000 shares of its common stock of
$5.00 par value for 35,100 of the 39,000 outstanding
capital stock of $1.00 par value of Salmaz Enterprise.
(For simplicity the out-of-pocket costs of the combination
paid by Paramount Corporation are ignored.)
49
Financial statements of Paramount Corporation and the
translated financial statements of Sa1maz Enterprise for
the year ended December 31, 1977 (prior to business combination) are presented below.
Income Statement for Year
Ended December 31, 1977
Rials
Revenue
Net Sales
7,800,000
Costs and Expenses
Cost of Goods Sold 5,400,000
Selling-Gen. Admin.
400,000
Interest Expense
266,667
Depreciation
-0Amortization
5,000
Income Taxes
1,035,000
7,Ioo,oo7
Net Income
593,333
Salmaz
Rate
Dollars
Paramount
Dollars
.015
117,000
200,000
.015
.015
.015
81,000
6,000
4, 000
-075
15,525
lOo,oOO
10,400
127,000
33,000
10,000
9,000
-019,200
198,200
1,8oo
13,000
1,800
14,800
.015
.015
Statement of Retained
Earnings for Year Ended
Dec. 31, 1977
Retained Earnings
Jan. 1, 1977
Net Income
Dividends
Retained Earnings
Dec. 31, 1977
1,333,334
693,333
z,o2o,oo7
.015
20,000
10,400
30,400
266,667
.015
4,000
5,000
26,400
9,800
1,760,000
.015
50
Balance Sheet as of
December 31, 1977
Rials
Assets
Cash
600,000
Accounts Receivable
600,000
Inventories
1,400,000
Prop.,Plan & Equip. 4,000,000
Patents & Trademarks
66,667
Goodwill
·
200,000
6,866,667
Liabilities & Stockholders' Equity
Accounts & Notes
Payable
Income Tax Payable
Long Term.Debt
Common Stock, $5
Par Value
Capital Stock, $1
Par Value
Paid-in Capital in
Excess of Par
Retained Earnings
1,000,000
200,000
466,667
Salmaz
Rate
Dollars
.015
.015
.015
.015
.015
.015
9,000
9,000
21,000
60,000
1,000
3,000
.015
.015
.015
-0-
Paramount
Dollars
3,000
28,000
29,000
90,000
-0-
-0-
103,000
150,000
15,000
3,000
7,000
40,000
13,200
17,000
-0-
60,000
2,600,000
.015
39,000
-0-
840,000
1,760,000
.015
.015
12,600
26,400
10,000
9,800
6,866,667
103,000
150,000
Tables 1 through 6 present translations and the working
papers and related journal entries for consolidating the
income statement, statement of returned earnings and balance sheet for Paramount Corporation and its 90%-owned
subsidiary Salmaz Enterprise, accounted for as a pooling
of interests. The following codes are used in the above
mentioned tables:
c
Current rate of exchange, end of month
= Historical rate of exchange, date of purchase
A = Average rate of exchange
R = Sign for Iranian rials
H
=
51
The exchange adjustment used in these tables is calculated in the following manner:
First, at the close of
the period all balance sheet and income statement accounts
are translated at the rate required by the selected translation method.
Second, after completion of translation,
the income, less dividends in dollars, is added to the
beginning dollar balance of retained earnings, then the
sum of those amounts is deducted from the ending dollars-retained earnings shown in the translated balance sheet.
Table 1 illustrates the initial translation of
Salmaz Enterprise financial statements and their consolidation into Paramount Corporation's financial statements
for the year ending December 31, 1977.
Since all accounts
are uniformly translated at the current rate of Rl
=
$.015, there is no gain or loss involved in translation
process.
Table 2 shows the translation and consolidation
process for the year ending December 31, 1978 with the
assumption that the rate prevailing on that date has remainted unchanged since December 31, 1977.
introduced in Table,2.
Nothing new is
This table is presented only for
comparison to indicate that when there is no change in exchange rate, the translation process is very simple and
requires adoption of no particular method.
All assets,
liabilities, revenue and expense accounts are translated
at the current rate which is the same as the historical
52
rate.
Table 3 illustrates use of the current rate method
for translation on December 31, 1978 and recognizes the
exchange adjustment in current income.
It is assumed that
on December 31, 1978 there is a .002% devaluation of the
local currency (Iranian Rials) from Rl
$.013.
= $.015 to Rl =
Under the current rate method all assets, liabil-
ities, revenue, and expense accounts are translated at the
current rate (.013) and there is an exchange loss of
$10,400 [($10,400 + $26,400- $4,160) - $22,240 = $10,400]
which, by coincidence, is offset by the ordinary income
of $10,400 for the current period, resulting an adjusted
net income of zero.
Table 4 uses the current rate method for translation
with one exception; the exchange loss of $9,360 ($10,400 x
90% = $9,360) is adjusted to owner's equity rather than
net income of the current period.
The translation and
consolidation process, based on this table, is supported by
the author throughout this thesis.
Table 5 illustrates the use of the current - noncurrent method for translating the financial statements of
Salmaz Enterprise and consolidating it with the financial
statements of Paramount Corporation.
Under the current -
noncurrent method, all current assets and liabilities are
translated at the current rate of Rl
= $.013, and all non-
current assets and liabilities are translated at the
53
historical rate of Rl = $.015.
In the income statement,
a simple average of the beginning-of-year and end-of-year
exchange rates is used to translate revenue and expense
accounts other than depreciation and amortization, which
is translated at historical rates applicable to the related assets.
The resulting exchange loss of $4,140
[($10,793 + $26,400 - $4,160) - $28,893
= $4,140]
is ad-
justed to Income of Period, reporting an adjusted net
income of $6,653.
Table 6 presents the consolidation of Paramount
Corporation's financial statements with Salmaz Enterprise's
translated financial statements.
The temporal method is
used in this translation process.
The major difference
between this table and Table 5, which uses the current noncurrent method, is that under this table, local inventory is translated at the historical rate (.014) and local
long-term debts are translated at the current rate (.013).
The exchange loss of $1,139 [($10,793 + $26,400- $4,160) -
$31,894 = $1,139] is adjusted to Current Income.
It should be indicated that the monetary - nonmonetary
method is similar in result to the temporal method.
fore, it is not separately presented in this thesis.
There-
Exhibit 1
PARAMOUNT AND SALMAZ
Recording Combination as
A Pooling of Interests
70,200;
Investment in Subsidiary (90% x $78,000
Common Stock (4,000 shares x $5)
Paid-in Capital in Excess of Par
[(90% X $51,600) - $20,000]
·
Retained Earnings of Subsidiary (90% x $26,400)
To record issuance of 4,000 shares of common stock, $5 par
value of Paramount Corporation, for 35,100 of the 39,000
outstanding capital stock, $1 par value, of Salmaz Enterprise in a business combination accounted for as a pooling
of interests.
20,000
26,440
23,760
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidation Eliminations
December 31, 1977
,,
(a~
Capital Stock--Salmaz
Paid-in Capital in Excess of Par--Salmaz
Retained Earnings--Salmaz (10% x $20,000)
Retained Earnings of Subsidiary--Paramount
Investment in Subsidiary--Paramount
Minority interest in Subsidiary
To eliminate intercompany investment and establish
minority interest in subsidiary at beginning of year
[10% X ($39,000 + $12,600 + $20,000) = $7,160].
I
39,000
12,600
2,000
23,760
70,200
7,160
lJ1
.p.
Exhibit 1 (Continued)
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidation Eliminations
December 31, 1977
(b) Minority Interest in Net Income of Subsidiary
Minority Interest in Subsidiary
To establish minority interest in net income of
subsidiary
(10% X $10,400 = $1,040).
(c) Minority Interest in Subsidiary
Minority Share in Dividend of·subsidiary
To establi.sh minority share in dividend of subsidiary
(10% X $4,000 = $400).
1,040
1,040
400
400
VI
VI
Pooling of interests: partially owned subsidiary
Table 1
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidating Financial Statements
Year Ended December 31, 1977
Subsliliary-Excll. Subsidiary Parent
Consolida- Consoliin
Rates
in
in
tion
dated
Rials
C*Rate Dollars
Dollars Eliminations
Income Statement
Revenue
Net Sales
Intercompany investment income
Costs and expenses
Cost of goods sold
Selling general and
admin. expenses
Interest expens.es
Depreciation
Amortization
Income tax expenses
R7,800,000
-0-
RT, 8bD,~OOO~
R5,400,000
400,000
266,667
-05,000
1,035,000
C .015 $117,000
--c-~-
c
c
c
c
c
-0-
~ --c--~$Tl7700Cf
.015 $ 81,000
.015
.015
.015
.015
6,000
4,000
-075
15,525
$200,000
-
-0-
$317,000
-.. ·.
~ZOO~OO-c-0-c-c-~~-.
-0. $317 000
$127,000
$208,000
33,000
10,000
9,000
39,000
14,000
9,000
75
34,725
:.l,O-
19,200
*Code
l11
0'1
Table 1 (Continued)
Subslct1.ary
in
Rials
Minority interest in
net income of
subsidiary
Net Income
Statement of Retained
Earnings
Retained earnings,
Jan. 1, 1977
Net Income
Exch-. ·· SubsiaTary Parent -Conso1Taa- ConsoliRates
in
in
tion
dated
C Rate
Dollars Dollars Eliminations
. . o-
R7' 10'6, '667 .........$106, BOD' . . $198, TO'O
:}..,040
(b)$1,040
· · · ·$1, U40 · $305, 840
· · $ 10,400 · · $ · 1,'8'00
$(1,040)• $ IT, 160
-0-
-0-
R .- 693,333 ·
Rl,333,334
C .015 $ 20,000
693 333
10 ' .400
$ 30,4oo
'
R2,o26,667
Dividends
266,667
Retained earnings
Dec. 31, 1977
. ·lo-·~7--c-o·o·
R . . . . .
Balance Sheet
Assets
Cash
Accounts receivable
R 600,000
600,000
,
_,
c .015
$ 13,000 (a)$(2,000) $ 31,000
1 ' 800
$ I4,soo
4,000
(1 , 040)
11 ' 160
$(3,040) $ 42,160
5,000 (c)$
(400)
8,600
. . ·26'
.
. .4o·o·
. . . ·. ·. $. ·. ·9·
. . .8o-o·o
.
. . . · · .$(
. . .,..2--,---;-6-T.fVo·~·$.-3-..,..3.
.
'i-U
.
. . . .·5·6-o-·
.
·oo·o ·. · · · ·. ·. ·. ·. ·$
'•---··-·
·-·'
'
---
.
C .015 $
c .015
...
9,000
9,000
$
3,000
28,000
$ 12,000
37,000
c..n
"
Table 1 (Continued)
Inventories
Investment in Subsidiary
Property, plant and
equipment--net
Patents and trademarks
Goodwill
& Stockholders' Equity
Accounts and notes
payable
Income tax payable
Long term debt--local
Conunon stock, $5 par
value
Capital stock, $1 par
value
Paid-in capital in
excess of par
Retained earnings
Retained earnings of
subsidiary
Minority interest in
subsidiary
Subsidiary
in
Rials
Rl,400,000
Exch. Subsidiary Parent
ConsolidaRates
in
in
tion
C Rate
Dollars Dollars
$ 29,000
C .015 $ 21,000
-0-
-0-
c
4,000,000
66,667
200,000
R6,866,667 ·
c
c
Rl,OOO,OOO
200,000
466,667
c .015
c .015
c . 015
70,200 (a)$(70,200)
.015 $ 60,000
$ 90,000
.015
1,000
-0.015
3,000
-0$103,000 · · $220,200
Cons6lLidated •
$50,000
-0-
150,000
1,000
3,000
$(70,200)?253,000
L~abilities
-02,600,000
840,000
1,760,000
-0-
c
c
c
$ 15,000
3,000
.
7,000
$ 40,000
13,200
17,000
$55,000
16,200
24,000
-0-
80,000
80,000
.015
39,000
-0-(a)$(39,000)
-0-
.015
.015
12,600
26,400
36,440(a) (12,600)
9,800
(2,640)
36,440
33,560
-0-
23,760(a) (23,760)
-0-
(a)
7,160
7,800
(b)
1' 040
(c)
(400)
. :ru),,:866,667: ..... :: :$103,000:: :$220,200.: ${70,200)$253,000
IJt
00
Exhibit 2
PARAMOUNT CORPORATION
Journal Entries
December 31, 1978
Cash
4,320
4,320
Investment in Subsidiary--Paramount
To record receipt of dividend from Salmaz enterprise.
Investment in Subsidiary--Paramount
Intercompany Investment Income--Paramount
To record 90% of Salmaz enterprise
Net income for year ended December 31, 1978
10,800
10,800
VI
\.0
Exhibit 2 (Continued)
PARAMOUNT AND SALMAZ SUBSIDIARY
Consolidation Eliminations
December 31, 1978
(a) Capital Stock--Salmaz
Paid-in Capital in Excess of Par--Sa1maz
Retained Earnings--Salmaz (10% x $26,400)
Retained Earnings of Subsidiary--Paramount
Intercompany Investment Income--Paramount
Investment in SubsJLdiary-·-Paramount
Dividends--Salmaz
Minority Interest in Subsidiary
To eliminate intercompany investment, and related
accounts for stockholders' equity of subsidiary,
and investment income from subsidiary.
(b) Minority Interest in Net Income of Subsidiary
Minority Interest in Subsidiary
To establish minority interest in net income
of subsidiary
(10% X $12,000 = $1,200).
(c) Minority Interest in Subsidiary
Minority Shares in Dividends of Subsidiary
To establish minority share in dividend of
subsidiary.
(10% X $4,800 = $480).
39,000
12,600
2,640
23,760
10,800
1,.ZOO
76,680
4,320
7,800
1,200
480
480
0'\
0
Pooling of interests: partially owned subsidiary
Table 2
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidating Financial Statements
Year Ended December 31, 1978
s-ubsidia.ry~Exch.
in
Rials
Income Statement
Revenue
Net Sales
Intercompany investment income
Costs and expenses
Cost of goods sold
Selling, general and
admin. expenses
Interest expenses
Depreciation
Amortization
Income tax expenses
Minority interest in
net income of
subsidiary
Net Income
Rates
C Rate
Suoslaiary-Parent
ConsoTida- -consoiiin
in
tion
dated
Dollars Dollars Eliminations
R9,066,667 H=C.015 $136,000
-0R9, '066 , 667 .
$356,000
-010,800(a)$(10,800)
-0. . . $13 6 , 000 . . '$230, 800 . . $ (In, 800} $356 , 00 0
R6,000,000 H=C.015 $ 90,000
660,000 H=C.015
400,000 H=C.Ol5
6,667 H=C.Ol5
1,200,000 H=C.015
R8, 266,667
~ 800,000
$220,000
9,900
-06,000
100
18,000
. $124,000
$ 12,000
$140,000
$230,000
21,200
9,800
9,000
-024,000
31,100
9,800
15,000
100
42,000
(b)
$1,200
1,200
$329-; 200
$(12,000) $ 26,800
$20q,OlJ0-~~. -$1~200
$ 26,800
n
0\
1-'
Table 2 (Continued)
Suosidiary
in
Rials
Statement of Retained
Earnings
Retained earnings,
Jan. 1, 1978
Net Income
Dividends
Retained earnings
Dec. 31, 1978
Exch. Subsidiary Parent
Consolida- ConsoliRates
in
in
tion
dated
C Rate
Dollars Dollars Eliminations
Rl,760,000 H=C.Ol5 $ 26,400
800,000
12,000
R2,56~~
$ 38,400
320,000 H=C.Ol5 $
R2, 240,000
4,800
$ 33,600
Balance Sheet
Assets
Cash
Rl,OOO,OOO H=C.015 $ 15,000
Accounts receivable
940,000 H=C.Ol5
14,000
Inventories
1,933,333 H=C.Ol5
29,000
Investment in
subsidiary
-0Property, plant and
equipment--net
3,600,000 H=C.Ol5
54,000
Patents and trademarks
65,000 H=C.015
975
Goodwill
195,000 H=C.Ol5
2,925
R7, 733,333
$116,ooo ·
$
9,800(a)$(2,640)
26,800
(10,800)
(1,200)
$ 33,560
26,800
$
31),1)00~14,640)
$ 60,360
$
5,520(a) (4,320)
(c)
(480)
5,520
$ (9~-840)
$ 54. 840
$ 31,080
$
$ 21,800
6,800
32,000
35,000
46,100
64,000
76,680(a)(76,680)
81,000
-0-0$2J1,48o
-0-
135,000
975
2,925
$(76,68o)· $27o,8oo
(j\
N
Table 2 (Continued)
su.osiafary- -E:xcli.
in
Rates
Rials
C Rate
Liabilities & Stockholders' Equity
Accounts and notes
payable
Income tax payable
Long term debt--local
Common stock, $5 par
value
Common stock, $1 par
value
Paid-in capital in
excess of par
Retained earnings
Retained earnings of
subsidiary
Minority interest in
subsidiary
Consoirda- Consoliin
tion
dated
Dollars Eliminations
subsidiarYl'arent~-
in
Dollars
Rl,400,000
120,000
533,333
H=C.Ol5 $21,000
H=C.Ol5
1,800
H=C.Ol5
8,000
-0-
-0-
~?
33,000
15,000
12,200
$ 54,000
16,800
20,200
80,000
80,000
2,600,000
H=C.Ol5
39,000
-0-(a)$(39,000)
-0-
840,000
2,240,000
H=C.Ol5
H=C.Ol5
12,600
33,600
36,440(d) (12,600)
31,080
(9,840)
36,440
54,840
-0-
23,760(a) (23,760)
-0-
-0-
Ri ,733,333 . . .
(b)
(c)
(d)
1' 200
(480)
7,800
8,520
. . $116,000 .• $231,480 . $(76 ,680) $270,800
0'\
l.V
Exhibit 3
PARAMOUNT CORPORATION
Journal' Entries
December 31, 1978
Cash
Investment in Subsidiary--Paramount
To record receipt of dividend from Salmaz enterprise.
3,744
3,744
PARAMOUNT AND SALMAZ SUBSIDIARY
Consolidation Eliminations
December 31, 1978
(a) Capital Stock--Salmaz
Paid-in Capital in Excess of Par--Salmaz
Retained Earnings--Salmaz (10% x $26,400)
Retained Earnings of Subsidiary--Paramount
Intercompany Investment Income--Paramount
Investment in Subsidiary-~Paramount
Dividends--Salmaz
Minority Interest in Subsidiary
To eliminate intercompany investment, and related
accounts for stockholders• equity of subsidiary,
and investment income from subsidiary.
(b) Minority Interest in Subsidiary
Minority Shares in Dividends of Subsidiary
To establish minority share in dividend of subsidiary.
(10% X $4,160 = $416)
39,000
12,600
2,640
23,760
66,456
3,744
7,800
416
416
0\
.(::--
Pooling of interests: partially owned subsidiary
Table 3
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidating Financial Statements
Current Rate Method
(Exchange Adjustments Recognized in Income Currently)
Year Ended December 31, 1978
Subsl.aia.r-y--Excn~----s-uos:Ldr-ary-
in
Rials
Income Statement
Revenue
Net Sales
Intercompany investment income
Costs and expenses
Cost of goods sold
Selling, general and
admin. expenses
Interest expenses
Depreciation
Amortization
Income tax expenses
Minority interest in
net income of
subsidiary
R9,066,667
Rates
C Rate
C .013 $117,867
$220,000
-0-
-0-
.013 $ 78,000
$140,000
$218,000
.013
8,580
.013
.013
.013
5,200
87
15,600
21,200
9,800
9,000
-024,000
29,780
9,800
14,200
87
39,600
-0-
RT, 066! 667~---.
R6,000,000
660,000
400,000
6,667
1,200,000
RB-;-2oo:067
in
Dollars
Parent ____ ConsoTi-aa---consoiiin
tion
dated
Dollars Eliminations
c
c
c
c
c
$117--;8~67-. ~~$CZZO~UO
$337,867
$
$107,467 · ·
-0$337 '8 6 7
..
~T~oo--~
-0-
-o-
-0~J~67
~
VI
Table 3 (Continued)
Subsidiary
in
Rials
Income (loss) before
exchange adjustments
Exchange adjustments
R 800,000
-0-
Net Income
·R
' ' . '·8·oo·
'
' ·oo·o·
Statement of Retained
Earnings
Retained earnings,
Jan. 1, 1978
Net Income
Dividends
Retained earnings,
Dec. 31, 1978
Balance Sheet
Assets
Cash
Accounts receivable
Inventories
Exch. Subsidiary Parent
Consolida- ConsoliRates
in
in
tion
dated
G Rate Dollars
Dollars Eliminations
$ 10,400
(10, 400)
$ 16,000
-0-
$
-0-
$ 26,400
(10, 400)
· ·. '· ·' ·' .$ ·' · · ·- ·o - '· '· y$ '·1·6·
' , ·oo·o
' . .
'· ·. .$
- ·o -
$ 16 ' ooo
Rl,760,000
H .015 $ 26,400
800,000
R2, 560, ooo
-0-
320,000
$ 26, 4oo
c
· R2, 240,000
Rl,OOO,OOO
940,000
1,933,333
.013
.013 $ 13,000
.013
12,220
.013
25,133
9,800 (a)$(2,640) $ 33,560
-016,000
16,000
$ 15, soo---vrz, 64o). r4-~3-oo
5,520 (b)
(416)
(a) (3,744)
4,160
$ 22,240
c
c
c
$
$ 20,280
$
6,224
32,000
35,000
5,520
$(1,520) $ 44,040
$ 19,274
44,220
60,133
0\
0\
Table 3 (Continued)
Su1J~sTdiary--Exch~-- suosiaTaryPareiiE-~Co1is01T<::ra~---
in
Rials
Rates
C Rate
in
Dollars·
in
Eliminations
Dollars
conso-ridated
Investment in
-0Subsidiary
-0-0- $ 66,456(a)$(66,456)
Property, plant and
equipment--net
R3,600,000 C .013 $ 46,800
81,000
$127,800
Patents and trademarks
65,000 c .013
845
-0845
-02 535
' 195' 000 ' c . 013 ' 2',5'35 '
Goodwill
R7, 7}3, 333
. $100, 533 • • '$Z20, '680 ' $ (66, #5'6). $254: 75 7
Liabilities & Stockholders' Equity
Accounts and notes
payable
Income tax payable
Long term debt--local
Common stock, $5 par
value
Capital stock, $1 par
value
Paid-in capital in
excess of par
Retained earnings
Retained earnings of
subsidiary
Minority interest in
subsidiary
Rl,400,000
120,000
533,333
c .013 $ 18,200
1,560
c .013
c .013
6,933
$ 33,000
15,000
12,200
$ 51,200
16,560
19,133
-0-
80,000
80,000
2,600,000
H .015
39,000
-0-(a)$(39,000)
-0-
840,000
2,240,000
H .015
12,600
22,240
36,440(a) (12,600)
20,280
1,520
36,440
44,040
-0-
23,760(a) (23,760)
-0-
-0-
(a)
7,800
7,384
(416)
· $10'0,'533 · · '$270,'680 · · $(66,456)· $254,757
(b)
RT,733,333 ·
"'
"'-..
Exhibit 4
PARAMOUNT CORPORATION
Journal Entries
December 31, 1978
Paid in Capital in Exce:ss of Par--Paramount
Retained Earnings of Subsidiary--Paramount
Investment in Subsidiary--Paramount
To adjust Paramount Corporation's equity in
Salmaz enterprise to reflect the decrease in the
investment in subsidiary due to devaluation of
Salmaz enterprise currency.
6,192
3,168
Cash
3,744
9,360
3,744
Investment in Subsidiary--Paramount
To record receipt of dividend from Salmaz
enterprise.
Investment in Subsidiary--Paramount
Intercompany Investment Income--Paramount
To record 90% of Salmaz enterprise
Net income for year end1ed December 31, 1978
9,360
9,360
0'1
(X)
Exhibit 4 (Continued)
PARAMOUNT AND SALMAZ SUBSIDIARY
Consolidation Elimination
December 31, 1978
(a) Capital Stock--Salmaz
Paid-in Capital in Excess of Par--Salmaz
Retained Earnings--Salmaz (10% x $22,880)
Retained Earnings of Subsidiary--Paramount
Intercompany Investment Income-~Paramount
Investment in Subsidiary--Paramount
Dividends--Salmaz
Minority Interest in Subsidiary
To eliminate intercompany investment, and related
accounts for stockholders' equity of subsidiary,
and investment income from subsidiary.
(b) Minority Interest in Net Income of Subsidiary
Minority Interest in Subsidiary
To establish minority interest in net income
of subsidiary.
(10% X $10,400 = $1,040).
(c) Minority Interest iri Subsidiary
Minority Shares in Dividends of Subsidiary
To establish minority share in dividend of
subsidiary.
(10% X $4,160 = $416).
33,800
10,920
2,288
20,592
9,360
66,456
3,744
6,760
1,040
1,040
416
416
0"\
1..0
Pooling of interests: partially owned subsidiary
Table 4
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidating Financial Statements
Current Rate Method
(Exchange Gain (Loss) Adjusted to Stockholders' Equity)
Subsidiary -Exch. Subsur1ary Parent--ConsoTiaa-=--consoTiin
Rates
in
in
tion
dated
Rials
G Rate
Dollars Dollars Eliminations
Income Statement
Revenue
Net Sales
Intercompany investment income
R9,066,667
R97Qoo~67
Costs and expenses
Cost of goods sold
Selling, general and
admin. expenses
Interest expenses
Depreciation
Amortization
Income tax expenses
Minority interest in
net income of
subsidiary
Net Income
R6,000,000
C .013 $117,867
..
.
$220,000
$337,867
9,360 (a)$(9,360)
$1T7--;SOT~--"$22-9~1oTI- ····-919~:lo0)
-0$337,867
c .013 $ 78,000
$140,000
$218,000
21,200
9,800
9,000
-024,900
29,780
9,800
14,200
87
39,600
660,000
c .013
8,580
400,000
6,667
1,200,000
c .013
c .013
c .013
5,200
87
15,600
(b)
1,040
1,040
RB, 266,667
$107, ZioT___$_2_oq:-,uoo·-----~TI0~4oor $3T2, so7
$
$ 10,400
800,000
$ 25,360
$(10,400) $ 25,360
-...J
0
. I
Table 4 (Continued)
Sub-si<Il.-ary-- Exc1:1.-- -subsTdiary Parent - --consoTraa.~----coiiso11in
Rates
in
in
tion
dated
Rials
C Rate
Dollars Dollars Eliminations
Statement of Retained
Earnings
Retained earnings,
Jan. 1, 1978
Rl,760,000
c .013 $ 22,880
800,000
10,400
25,360
R2,560,000
$ 33,280
$ 35,160
Net Income
Dividends
Retained earnings,
Dec. 31,1978
Balance Sheet
Assets
Cash
Accounts receivable
Inventories
Investment in
Subsidiary
Property, plant and
equipment--net
Patents and trademarks
Goodwill
320,000
c .013
· R2, 240 , 00 0
Rl,OOO,OOO
940,000
1,933,333
4,160
$ 29,120
-·
C .013 $ 13,000
12,220
c .013 25,133
c .013
-0-
3,600,000 c
65,000 c
195,000 c
R7',73'J,333 ' ..
$
-0-
9,800(a) $(2,288) $ 30,392
25,360
(9' 360)
(1' 040)
$(12,688) $ 55,752
5, 520 (c)
(416)
· (a) · (3, 744)
$ 29,640
$
5,520
$(8,528) $ 50,232
6,224
32,000
35,000
66,456(a)$(66,456)
$ 19,224
44,220
60,133
-0-
.013 46,800
81,000
127,800
.013
845
-0845
.013
2,535
-02,535
·' · '· '$100,5'3'3 ·' $2'20,680,' '$'('66',45'6)· $254,757
===~============~========~====================
'-1
1-'
Table 4 (Continued)
Liabilities & Stockholders• Equity
Accounts and notes
payable
Income taxes payable
Long term debt--local
Common stock, $5 par
value
Capital stock, $1 par
value
Paid-in capital in
excess of par
Retained earnings
Retained earnings of
subsidiary
Minority interest in
subsidiary
Subsidiary
in
Rials
Exch. Subsidiary Parent
Consolida- ConsoliRates
in
in
tion
dated
C Rate
Dollars Dollars Eliminations
Rlt400,000
120,000
533,333
C .013 $ 18,200
c .013
1,560
c .013
6,933
2,600,000
840,000
2,240,000
-0-
R7,733,333 ·
c
c
c
.013
33,800
.013
.013
10,920
29,120
-0-
$ 33,000
15,000
12,200
$ 51,200
16,560
19,133
80,000
80,000
-0-(a)$(33,800)
30,248
29,640
-0-
(10, 920)
(8' 528)
30,248
50,232
20,592 (a)(20,592)
-0-
(a)
(b)
(c)
6,760
1,040
(416)
7,384
· $100,583 · · $220,680 · $(66,456) $254,757
.......
N
Exhibit 5
PARAMOUNT CORPORATION
Journal Entries
December 31, 1978
Cash
Investment in Subsidiary--Paramount
To record receipt of dividend from Salmaz
enterprise.
Investment in Subsidiary--Paramount
Intercompany Investment Income--Paramount
To record 90% of Salmaz enterprise
Net income for year ended December 31, 1978
3,744
3,744
5,988
5,988
"'w
Exhibit 5 (Continued)
PARAMOUNT AND SALMAZ SUBSIDIARY
Consolidation Eliminations
December 31, 1978
(a) Capital Stock--Salmaz
Paid-in Capital in Excess of Par--Salmaz
Retained Earnings--Salmaz (10% x $26,400)
Retained Earnings of Subsidiary--Paramount
Intercompany Investment Income--Paramount
Investment in Subsidiary--Paramount
Dividends--Salmaz
Minority Interest in Subsidiary
To eliminate intercompany investment, and related
accounts for stockholders' equity of subsidiary, and
investment income from subsidiary.
39,000
12,600
2,640
23,760
5,988
72,444
3,744
7,800
(b) Minority Interest in Net Income of Subsidiary
Minority Interest in Subsidiary
To establish minority interest in net income of
subsidiary.
(10% X $6,653 = $665)
665
(c) Minority Interest in Subsidiary
Minority Shares in Dividends of Subsidiary
To establish minority share in dividend of
subsidiary.
(10% X $4,160 = $416).
416
665
416
.........
+="-
Pooling of interests; partially owned subsidiary
Table 5
CORPORATION AND SALMAZ SUBSIDIARY
Consolidating Financial Statements
Current-Noncurrent Method
(Exchange: Adjustment Recognized in Income Currently)
Year Ended December 31, 1977
PA~IOUNT
Income Statement
Revenue
Net Sales
Intercompany investment income
Costs and expenses
Cost of goods sold
Selling, general and
admin. expenses
Interest expenses
Depreciation
Amortization
Income tax expenses
Minority interest in
net income of
subsidiary
Sufi-s-idiary
in
Rials
Rates
C Rate
R9,066,667
A .014 $126,933
Exc1i~---su.osl.-cfiarY-Parerit
-0R9,066,667
R6,000,000
in
Dollars
$220,000
consoJ.Tdated
$346,933
5,988 (a)$(5,988)
-0$126,'933 .. $225,988.
$(5,'988f]:T4-6~
A .014 $ 84,000
660,000
A .014
9,240
400,000
6,667
1,200,000
ll . 015
6,000
100
16,800
R8, 266.667
-cons-oiida-
in
tion
Dollars Eliminations
H .015
A . 014
· · $116.140
$140,000
$224,000
21,200
9,800
9,000
30,440
9,800
15,000
100
40,800
-0-
24,000
·
~2nZt:~-ooo
(b)
·$
·
665
665
665~- $320~ 805
........
IJl
Table 5 (Continued)
Subsidiary
in
Rials
Excn:-----subsidiary Parent
ConsolidaRates
in
in
tion
G Rate
Dollars Dollars Elimination
Income (loss) before
exchange adjustments
Exchange adjustments
R 800,000
-0-
$ lD, 793
(4,140)
Net Income
R • 800,000
$
6,653
Statement of Retained Earnings
Retained earnings,
Jan. 1, 1978
Rl, 760,000 H .015 $ 26,400
Net Income
800,000
Consolidated
$ 21,988
-0-
$(6,653) $ 26,128
(4' 140)
$ 21,988
$(6,653) $ 21,988
$
6,653
9,800 (a)$(2,640) $ 33,560
21,988
(5,988)
21,988
(665)
R~60,000
Dividends
Retained earnings,
Dec. 31, 1978
Balance Sheet
Assets
Cash
Accounts receivable
Inventories
$ 33,053
320,000 C .013
· R2 ,240, 000
Rl,OOO,OOO
940,000
1,933,333
c
c
.013 $ 13,000
.013
12,220
.013
25,133
31,7~8
$(9,293) $ 55,548
(416)
5,520 (a) (3,744)
5,520
(c)
4,160
$ 28,893
c
$
$ 26,268
$
6,224
32,000',
35,000
$(5,133}
~_20,028
$ 19,224
44,220
60,133
-....J
~
Table 5 (Continued)
Suosidiary
in
Rials
Exch. Subsidary
Rates
in
G Rate
Dollars
Parent
Consolida- Consoli·in
tion
dated
Dollars Eliminations
Investment in
Subsidiary
$ 72,444(a)$(72,444)
-0-0-0Property, plant and
R3,600,000 H .015 $ 54,000
81,000
$135,000
equipment--net
Patents and trademarks
65,000 H .015
975
975
-0Goodwill
2,925
195,000. H .015
2,925
-0R7,733,333
. · $108,253 . $2'26,668. $("1£,444). $262,477
Liabilities & Stockholders' Equity
Accounts and notes
payable
Income tax payable
Long term debt--local
Common stock, $5 par
value
Capital stock, $1 par
value
Paid-in capital in
excess of par
Retained earnings
Retained earnings of
subsidiary
Minority interest in
subsidiary
Rl,400,000
120,000
533,333
c
c
.013 $ 18,200
.013
1,560
H .015
8,000
-0-
$ 33,000
15,000
12,200
$ 51,200
16,560
20,200
80,000
80,000
2,600,000
H .015
39,000
-0-(a)$(39,000)
-0-
840,000
2,240,000
H .015
12,600
28,893
36,440(a) (12,600)
26,268
(5,133)
36,440
50,028
23,760(a) (23,760)
-0-
-0-
· ··RT,733, 333
(b)
665
8,049
(c)
(416)
(a)
7,800
· · · • $108,253 • • •$226, 66R • • }(72,A44)• $262,477
.......
.......
Exhibit 6
PARAMOUNT CORPORATION
Journal Entries
December 31, 1978
Cash
3,744
Investment in Subsidiary--Paramount
Intercompany Investment Income--Paramount
To record 90% of Salmaz enterprise net income for
year ended December 31, 1978
8,689
Investment in Subsidiary--Paramount
To record receipt of dividend from Salmaz enterprise
3,744
8,689
-.....!
00
Exhibit 6 (Continued)
PARAMOUNT AND SALMAZ SUBSIDIARY
Consolidation Eliminations
December 31, 1978
(a) Capital Stock--Salmaz
Paid-in Capital in Excess of Par--Salmaz
Retained Earnings--Salmaz (10% x $26,400)
Retained Earnings of Subsidiary--Paramount
Intercompany Investment Income--Paramount
Investment in Subsidiary--Paramount
Dividends--Salmaz
Minority Interest in Subsidiary
To eliminate intercompany investment, and related
accounts for stockholders' equity of subsidiary, and
investment income from subsidiary.
39,000
12,600
2,640
23,760
8,689
(b) Minority Interest in Net Income of Subsidiary
Minority Interest in Subsidiary
To establish minority interest in net income of
subsidiary
(10% X $4,654 = $965)
965
(c) Minority Interest in Subsidiary
Minority Shares in Dividends of Subsidiary
To establish minority shares in dividend of
subsidiary
(10% X $4,160 = $416)
416
75,145
3,744
7,800
965
416
-...j
\0
Pooling of interests: partially owned subsidiary
Table 6
PARAMOUNT CORPORATION AND SALMAZ SUBSIDIARY
Consolidating Financial Statements
Temporal Method
·
(Exchange Adjustments Recognized in Income Currently)
Year Ended December 31, 1978
SubSidTary- Excn.
in
Rials
Income Statement
Revenue
Net Sales
Intercompany investment income
R9,066,667
RDo'6~6o7
Costs and expenses
Cost of goods sold
Selling general and
admin. expenses
Interest expenses
Depreciation
Amortization
Income tax expenses
R6,000,000
660,000
Subsidiary Parent
Consolida- ConsoliRates
in
in
tion
dated
G Rat·e· · Dollars · · Dollars Eliminations
A .014 $126,933
········
$220,000
8,689
$126',.9~3'3'
A .014 $ 84,000
A . 014
9,240
400,000 n .o1s
6,667 H. • 015
1,200,000 A .014
6,000
100
16,800
$346,933
(~)$(8,689)
-0-
· · '$'2'28', 68'9 · · $(8, 68'9} $34'6, 933
$140,000
$224,000
21,200
9,800
9,000
-024,000
30,440
9,800
15,000
100
40,800
00
0
Table 6 (Continued)
Subsidiary
in
Rials
Exch. Subsidiary Parent
Consolida- Consoli
Rates
in
in
tion
dated
G Rate · Dollars Dollars Eliminations
Minority interest ~n net
income of subsid1.ary R8, 266 , 667
Income (loss) before
exchange adjustments
Exchange adjustments
Net Income
Statement of Retained
Earnings
Retained earnings,
Jan. 1, 1978
Net Income
R800,000
-0-
. R1f01f'OlJlJ• . .
'
Rl,760,000
320,000
R2,240,000
Balance Sheet
· Assets
Cash
Rl,OOO~OOO
receivable
lnvento:I:"ies
· $ 204,000
$ 10,793
$ 24,689
940~000
11933,333
$(9,654)
$25.828
-0(1, 139)
. . · $ · 9'70:1:)4'
·
'
$•
27.~6B9~-.
·
~9-:---:-6!5.
4)
·
$24
68{'\";1
J
...J
·'+' {.
'Y \: J
.
,
.015 $ 26,400
$
9,654
C .013
$
24,689
4,160
.013 $ 13,000
12,220
H ,014
27,067
c .013
9,800 (a)$(2,640)
(8,689)
(965)
36~CJS4---~3~wg--~\17.,-T94)
$ 31,894
c
965
965
· {9 ,654) $321.105
(1 ,139)
,uno--·
Retained earnings,
Dec. 31, 1978
Account~
H
$.1I.6,l~.O
800,000
R2~6U
Dividends
.
(b)
5,520 (c)
(410)
(a)$(3,744)
$ 28,969
$
6,224
32,000
35,006
$(8,134)
$33,560
24,689
$58, 249
5,520
$52,729
$19,224
44,220
62,067
co
t-'
Table 6 (Continued)
Subsia-iary- :Exch. Subs ia-rary -P arenF-- --Cotiso lTd a- Consolidated
in
Rates
in
in
tion
Rials
C Rate
Dollars Dollars Eliminations
Investment in Subsidiary
R
-0-0$ 75,145(a)$(75,145) $
-0$
Property, plant and
equipment--net
81,000
135,000
3l,600,000 H .015 54,000
Patents and trademarks
65,000 H .015
975
975
-0Goodwill
2,925
2,925
195,000 H .015
R7 ' 733 ' 333 · . . . . $110 ' 187 · . · $L:219·· ' 369 · . L.f\1
c:
y:-11f:'5"~~~~264 411
'
I
'-1
. '
71
Liabilities & Stockholders' Equity
Accounts and notes
payable
Income tax payable
Long term debt--local
Common stock, $5 par
value
Capital stock, $1 par
value
Paid-in capital in
excess of par
Retained earnings
Retained earnings of
subsidiary
Minority interest in
subsidiary
Rl,400,000
120,000
533,333
c .013 $18,200
c .013 1,560
c .013 6,933
-0-
$ 33,000
15,000
12,200
$ 51,200
16,560
19,133
80,000
80,000
2,600,000
H .015
39,000
-0- (a)$(39,000)
840,000
:2,240,000
H .015
12,600
31,894
36,440 (a)$(12,600)
28,969
(8 '134)
36,440
52,729
23,760 (a)$(23,760)
-0-
-0-
. Ft7,733,333..
. .. $110,187 ... $229,369
(b)
(c)
(a)
965
(416)
8,349
7, 800
$:(75,145}$264,411
00
tv
CHAPTER VI
SUMMARY AND CONCLUSION
S'tl.mtllary
This thesis has analyzed and investigated the conceptual weaknesses of various translation methods and has
recmmnended the current rate method of translat.::.ng financial statements from one currency to another which more
adequately fulfills the needs of investors.
The historical review of the problem indicates that
appropriate attention to the problem of foreign currency
translation can be traced to World War II.
Due to the
slowly changing currency rate among-industrial countries,
prior to World War II the problem of foreign currency
translation did not receive serious attention.
It was
only after World War II and due to the world-wide devaluation of currencies, various articles and pronouncements
about this problem (such as ARB No. 43, Chapter 12 which
advocated the current - noncurrent method of translation,
and studies by Professor Hepworth, which supported the
monetary - nonmonetary method) were published.
The most recent pronouncement in the area of
83
84
accounting for the translation of foreign currency transactions and foreign currency financial statements in the
United States has been proposed by the Financial Accounting Standards Board (Statement of Financial Accounting
Standards No. 8).
This statement, which recognizes the
temporal method as the appropriate method of translation
was issued in October, 1975.
Since its issuance, it has
been the target of tremendous criticism and is by far the
most controversial subject to which the Board has addressed itself in its five-year history.
The number of these·
criticisms from the accounting profession and other economic and financial groups finally reached it zenith when
at the January 31, 1979 meeting professional consensus
forced the board to formally schedule FASB No. 8 on its
agenda for additional consideration.
One of the most significant reasons for translating
the financial statement of a foreign subsidiary is to
obtain meaningful information concerning the results of
foreign subsidiaries' operations.
The preparation of con-
solidated financial statements, which are based on a
single currency, promotes this objective.
In translating
financial statements for consolidation purposes, the
preservation of the parent company's accounting principles
and currency as a unit of measurement are the objectives
of translation which were developed by FASB No. 8.
These
objectives have been rejected by the author because they
85
fail to recognize and maintain the financial relationships as they exist in a foreign environment.
In order to
supply the investors with useful information, the objectives of translation should be to preserve the local
accounting principles of a foreign entity and to recognize
the local currency as a unit of measurement for translating foreign financial statements.
Because the fundamental objective is to reflect the
factual and economic reality of the results of a foreign
subsidiary's operation, selecting the appropriate current
rate is of great significance.
The dividend remittance
rate is the most appropriate current rate since it fulfills the above mentioned objectives.
To determine the most appropriate method of translation, which is the primary objective of this thesis, the
four basic translation methods appearing in current accounting literature has been discussed.
Among these transla-
tion methods, the current - noncurrent method (which
translates the current assets and current liabilities at
the current rate effective at the balance sheet date, and
noncurrent assets and liabilities at the historical rate
in effect at the time these assets and liabilities were
recorded) has been rejected based on its theoretical shortcoming in selecting the balance sheet classification as a
basis for determination of the exchange rate.
The monetary - nonmonetary method (which translates
86
the monetary items at the current rate and nonmonetary
items at the historical rate) has also been rejected since
this method employs the charateristics of individual
balance-sheet ietms as a conceptual basis for selecting
the appropriate exchange rate, and it has little relevancy
to the objective of translation discussed in this thesis.
The temporal method, which is sanctioned by FASB No.
8 and is considered the most authoritative method of translation of foreign financial statements, translates the
assets and liabilities of the foreign entity in a way
which retains the accounting principle employed for valuation of these accounts.
This method has also been rejec-
ted because under this approach unreal exchange gains or
losses are introduced during translation.
These unreal
exchange gains and losses arise because inventory and
fixed assets are translated at the historical rate, while
the related debt (to which the foreign subsidiary has
committed itself in order to acquire these inventories and
fixed assets), is translated at the current rate.
This
method has been rejected since it does not comply with
the objectives of translation developed in this thesis.
Under the current rate method, all assets and liabilities are uniformly translated at the current exchange
rate.
This method is recommended in this thesis because
it satisfies the objectives of translation developed in
this study, and it has an additional advantage of being a
87
simple method.
As stated, the translation adjustment, or exchange
gain or loss, arises from the application of different exchange rates in the translation of the foreign subsidiary
balance sheet accounts.
The method of translation deter-
mines the size and source of these gains or losses.
The
treatment of these exchange adjustments is considered to
be one of the most controversial and unresolved issues
facing accountants today.
This controversy exists since
the exchange adjustment can be considered as a gain or
loss, an adjustment to a stockholder's equity, an adjustment to the cost of nonmonetary assets, or an adjustment
to interest expense.
Treatment of an exchange adjustment as a gain or
loss itself introduces other problems such as:
(1) dis-
tinguishing between realized and unrealized exchange loss
or gain and (2) recognizing these gains or losses in
income immediately or deferring them to a future period.
This deferment may be based on criteria such as criteria
of realization, conservatism, the possibility of reversal
of an exchange rate change in the future, the effect on
future income of the exchange rate change, or usefulness
to the readers of financial statements.
The advantages and disadvantages of all the possible
treatments of exchange adjustments has been discussed and
analyzed.
It is concluded that since this exchange adjust-
88
ment is the result of mathematical revision of the exchange rate, that to preserve the financial condition of
the foreign subsidiary and obtain a reasonable equivalency
between the original subsidiary financial statements and
the translated financial statements, these exchange adjustments should be made to the stockholder's equity.
Conclusions and Recommendations
The purpose of this thesis has been to determine an
appropriate method for translating foreign currency financial statements for use by investors.
The criterion developed in this thesis for the translation of foreign currency financial statements results in
the conclusion that the temporal method proposed in FASB
No. 8 for translating a foreign subsidiary's financial
statement, fails to recognize and preserve economic reality and financial relationships as they exist in the foreign environment, and it does not supply investors with
up-to-date, useful and relevant information to be applied
in their decision-making process.
To reflect a reasonable equivalency between original
and translated financial statements, the current rate
method should be used to translate the assets, liabilities,
revenues, and expenses of a foreign subsidiary expressed
in local currency into the domestic currency.
This
method, by recognizing the foreign currency as a unit
89
of measurement and preserving accounting principles
applied in the measurement of assets and liabilities of a
foreign subsidiary, depicts the true financial relationship and the results of operations shown in the subsidiary's financial statements and accordingly fulfills the
objectives of translation and provides investors with the
most up-to-date and meaningful information.
Since international business activities of multinational corporations are becoming increasingly important,
and the translation problem grows accordingly, these
multinational corporations, the research personnel at
universities, and the Financial Accounting Standards
Board could well devote their attention and resources to
further research in the area of translation of foreign
currency financial statements.
i
v
BIBLIOGRAPHY
American Accounting Association. "Report of Connnittee on
International Accounting," The Accounting Review,
Supplement to vol. XLVIII, 1973, 120-167.
American Institute of Certified Public Accountants.
Accountin Research and Terminolo
Bulletins, Final
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