TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Even though MNEs receive reports originally developed in a variety of different currencies, they eventually must end up with one set of financial statements in U.S. dollars in order to help management and investors get an aggregate view of worldwide activities in a common currency. The process of restating foreign currency financial statements into U.S. dollars is known as translation. The combination of all of these translated financial statements into one is known as consolidation.
Translation in the United States is a two-step process: The first step involves recasting the foreign currency financial statements into statements
Correct Procedures for U.S. Firms
The procedures that U.S. firms must follow to account for foreign currency transactions are found in Financial Accounting Standards Board (FASB) Statement No. 52, "Foreign Currency Translation," which was adopted in December 1981. The FASB is the private-sector organization in the United States that establishes accounting standards. Statement 52 requires that firms record the initial transaction at the spot-exchange rate that is in effect on that date and record receivables and payables at subsequent balance-sheet dates at the spot-exchange rate on those dates. Any foreign exchange gains and losses that arise from carrying receivables or payables during a period when the exchange rate changes are taken directly to the income statement.3 In its 1988 Annual Report, for example, Ford Motor Company stated the following: "Exchange gains and losses from transactions in a currency other than the local currency of the entity involved . . . are included in income. Changes in foreign exchange rates reduced net income by $117 million (24 cents a share) in 1988. . .. These amounts included net transaction and translation gains before taxes of $734 million in 1988. .. ."4 Although some information was provided, Ford did not specifically state how much of the exchange gain was due to foreign currency transactions and how much was due to the translation of foreign currency financial statements.

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