Running head: TRANSLATION FOREIGN- CURRENCY FINANCIAL STATEMENTS 1 TRANSLATION FOREIGN- CURRENCY FINANCIAL STATEMENTS 2 Translation Foreign- Currency Financial Statements Introduction Foreign currency translation can be defined as the conversion of the financial transactions of a company’s foreign subsidiaries into a reporting currency for recording in the parent company's financial statements. The financial statements include the income statement and the balance sheet among others. The functional currency, which is used when recording financial statements, is important because it is used by businesses in most transactions. The steps that are involved in this process are: 1) Determining the functional currency for the business, 2) recording the gains and losses on the translation of currencies, and 3) re-measuring the financial statements of the business in the functional currency. Current Trends in Foreign Currency Translation The existence of international trade has majorly contributed to the need for foreign currency translation. Companies in the United States have been major players in international trade (Guithues, 1994). Most of the companies that are headquartered in the United States have developed subsidiaries in many countries. For example, Coca Cola has subsidiaries in over 50 countries. It can therefore be seen that foreign currency translation is important for companies in the United States. One important reason for the existence of foreign currency translation is that foreign operations are not the same in all countries (Guithues, 1994). Each country has its own ways of reporting financial statements. For example, the accounting principles applied by companies in the United States are very different from those applied in other countries (Guithues, 1994). Financial results such as liabilities, assets, expenses and revenues are recorded differently in companies in the United States when compared to other countries. In the case of companies in the United States, they will need the foreign currency translation so as to reconcile their financial statements with the laid down accounting standards; meaning the standards have been put in place and must be adhered to (Guithues, 1994). These differences in accounting standards have called for measures that can be used to standardize operations. The Financial Accounting Standards Board (FASB) has been in charge of standardizing these operations (Guithues, 1994). A recent amendment on financial statements reporting has been made on the statement number 52. This amendment was meant to do away with changes in the reporting of earnings of a company. It replaces FASB Statement No. 8 and it presents standards for foreign currency translation that are designed to provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity and r ...

1. Running head: TRANSLATION FOREIGN- CURRENCY
FINANCIAL STATEMENTS 1
TRANSLATION FOREIGN- CURRENCY FINANCIAL
STATEMENTS 2
Translation Foreign- Currency Financial Statements
Introduction
Foreign currency translation can be defined as the
conversion of the financial transactions of a company’s foreign
subsidiaries into a reporting currency for recording in the parent
company's financial statements. The financial statements
include the income statement and the balance sheet among
others. The functional currency, which is used when recording

2. financial statements, is important because it is used by
businesses in most transactions. The steps that are involved in
this process are: 1) Determining the functional currency for the
business, 2) recording the gains and losses on the translation of
currencies, and 3) re-measuring the financial statements of the
business in the functional currency.
Current Trends in Foreign Currency Translation
The existence of international trade has majorly contributed to
the need for foreign currency translation. Companies in the
United States have been major players in international trade
(Guithues, 1994). Most of the companies that are headquartered
in the United States have developed subsidiaries in many
countries. For example, Coca Cola has subsidiaries in over 50
countries. It can therefore be seen that foreign currency
translation is important for companies in the United States. One
important reason for the existence of foreign currency
translation is that foreign operations are not the same in all
countries (Guithues, 1994). Each country has its own ways of
reporting financial statements. For example, the accounting
principles applied by companies in the United States are very
different from those applied in other countries (Guithues, 1994).
Financial results such as liabilities, assets, expenses and
revenues are recorded differently in companies in the United
States when compared to other countries. In the case of
companies in the United States, they will need the foreign
currency translation so as to reconcile their financial statements
with the laid down accounting standards; meaning the standards
have been put in place and must be adhered to (Guithues, 1994).
These differences in accounting standards have called for
measures that can be used to standardize operations.
The Financial Accounting Standards Board (FASB) has been in
charge of standardizing these operations (Guithues, 1994). A
recent amendment on financial statements reporting has been
made on the statement number 52. This amendment was meant
to do away with changes in the reporting of earnings of a
company. It replaces FASB Statement No. 8 and it presents

3. standards for foreign currency translation that are designed to
provide information that is generally compatible with the
expected economic effects of a rate change on an enterprise's
cash flows and equity and reflect in consolidated statements the
financial results and relationships as measured in the primary
currency in which each entity conducts its business (referred to
as its "functional currency").
Methods of Accounting in Translation
In the translation of foreign-currency financial statements, two
main methods can be used. The first method is known as the
temporal method (Pinto, 2011). This method is used for
subsidiaries of companies with foreign operations in a small
country in which all business transpires in U.S. dollars, not the
country’s local currency. The second method is known as the
current rate method (Pinto, 2011). In this method, local
currency is used as the functional currency. Such a method is
only possible in countries that are well developed such as the
United States.
Besides economic development, companies can use other factors
to determine the choice of method to be used as functional
currency. The first one is cash flow (Pinto, 2016). A company
that decides to use foreign currency as functional currency must
ensure that the selected country has a consistent supply of cash.
The second factor is financing indicators (Pinto, 2016). A
country whose foreign currency is used as a functional currency
by other countries should have effective financing methods.
This is so as to enable international companies to easily use its
currency. The third factor is the sales market indicators (Pinto,
2016). The sales market indicators must be high for a country’s
currency to be used as functional currency. These are among
some of the important indicators of an effective functional
currency.
Challenges in Translation Foreign- Currency Financial
Statements Reporting

4. The fact that foreign currency translation involves the use of
different currencies has brought about challenges for companies
with operations in other countries. There are three major
challenges that have been experienced in financial statements
reporting of foreign currency translation. The first challenge is
that gains and losses from foreign currency are hidden in the
comprehensive income section of financial statements (Spencer
& Richards, 2012). For a company that is still new in
international business, this would be a major challenge.
These gains and losses should instead be reported in the net
income of a given company. The second challenge is
experienced when cash flow statements from reporting are
consolidated in the balance sheets (Spencer & Richards, 2012).
The right way to report cash flow statements is by reporting
them based on the activities of a company. In reporting of these
statements, the company must use a functional currency that is
translated to the local currency. The third challenge is that
companies may fail to develop foreign currency translation in
countries that are highly inflationary (Spencer & Richards,
2012). This affects the whole process of foreign currency
translation. For example, in translating assets and liabilities, a
company may see it right to carry out the translation using
existing interest rates when in real sense adjustments have to be
made to cater for the introduction of functional currency.
Companies must be able to detect these challenges and solve
them appropriately.
Reducing Risks Involved in Foreign Currency Translation
There are different risks that are involved in foreign currency
translations and which may negatively impact on a company.
One major risk is called the currency translation risk (Sorensen
& Kyle, 2008). This is a risk that arises because a company’s
assets, equity and investment are in terms of a foreign currency.
Any decline in the value of the foreign currency will impact on
the given company either positively or negatively. One major
way of solving this problem and as such reducing the negative

5. impact on the company is by requesting for a loan in the given
foreign currency (Sorensen & Kyle, 2008). Once a company
acquires this loan, it can be exchanged into the local currency,
say U.S Dollars and in turn used to hedge risk. However, a
company must ensure that such an activity is reported in the
financial statements according to the guidelines that have been
laid down by the FASB.
The activity is reported under accounting for derivative
instruments and hedging activities (Sorensen & Kyle, 2008). It
is reported in the balance sheet after the necessary adjustments
have been done as had already been mentioned above. There
are other methods that could be used in hedging the risks that
arise as a result of foreign currency translation but the goal is to
ensure that a company reduces the negative impacts that these
translations may bring on it.
Conclusion
Financial statement reporting is important for any given
country. However, international trade has made this task to be
difficult. Companies that have operations in other countries are
forced to engage in foreign currency translation so as to ensure
that reporting is done in the right ways. As a result of the risks
involved in this activity, companies have been forced to find
methods of reducing the risks involved.
Discussion Question
How foreign currency translation helped international
businesses to reduce errors on financial statements?

6. References
Guithues, A., D. (1994). Reporting of Foreign Currency
Translation. Multinational Business Review, 2(1), 65.
Pinto, J. A. M. (2011). Foreign currency translation method
choice: Insights from game theory. Journal of Applied Business
Research (JABR), 18(4).
Sorensen, S. M., & Kyle, D. L. (2008). Currency Translation
Adjustments. Journal of Accountancy, 206(1), 42.
Spencer, S. L., & Richards, G. E. (2012). Three Common
Currency-Adjustment Pitfalls: How to Correctly Account for
Foreign-Currency Translations. Journal of Accountancy, 213(2),
30.