Translation of foreign subsidiaries
Of course, a multinational company will have many, perhaps most, of its subsidiaries trading in a currency other than that of the parent. Consequently there need to be rules for converting the financial statements into a single currency in order to produce consolidated statements. The standard that deals with this under IFRS is IAS 21 The Effects of Changes in Exchange Rates.
Before the oil price crisis in the 1970s many major currencies were managed by governments within a relatively fixed framework and large swings in exchange rates were relatively rare. However, as companies became more international they became exposed to a wider range of currencies. In addition, the oil price crisis triggered massive inflation, which in turn put pressure on exchange rates and governments mostly abandoned attempts to peg their rates and allowed them to float freely. One consequence of this was that converting (or ‘translating’) the statements of foreign subsidiaries started to throw up significant fluctuations year on year. In the US, under SFAS 8, these fluctuations were passed through the income statement, whereas in Europe they were mostly treated as temporary differences to be addressed in equity.
there need to be rules for converting the financial statements into a single currency … to produce consolidated statements
A consequence of this was a major review of accounting for foreign currency transactions, which eventually involved the FASB and the ...