Are Traditional Foreign Exchange Translation Methods Obsolete?

by Gerhard Mueller



The article discusses the traditional foreign exchange translation methods and its inadequacies. In most cases, operations abroad are stated originally in terms of applicable foreign currencies, and operations at home are stated in terms of U.S. dollars. However, consolidated financial statements can only be presented in a single currency unit. Some foreign currencies have to be translated whenever international operations are shown on a consolidated basis and the methods of translation affect the amounts of consolidated operating results and the financial position reported. Consequently, management has a direct stake in the translation of foreign currencies for purposes of financial accounting. First, the patterns of foreign exchange rate fluctuations are substantially different today from those of 35 or more years ago. Up to the time of World War II, foreign exchange rates primarily oscillated around some average or standard rate. Wars and other economic disturbances did produce substantial swings or even an occasional devaluation of a currency, but the usual expectation was that exchange rate fluctuations would tend toward some international equilibrium range. Foreign exchange translation introduces in essence a price-level factor into the accounts. Foreign exchange is a commodity that is regularly traded in a market place and therefore commands a price like any other commodity. This price is primarily an index of certain national and international monetary policies.

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