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Foreign Currency Financial Reporting from Euro to Yen to Yuan: A Guide to Fundamental Concepts and Practical Applications by Robert Rowan

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CHAPTER 7

The Intersection

Interplay of Mathematics, Exchange Rates, Accounting Standards, Economics, and Time

Since monkeys first began to chatter in trees, neither man nor beast had ever denied or doubted Multiplicity, Diversity, Complexity, Anarchy, Chaos. Always and everywhere the Complex had been true and the Contradiction had been certain.1

—Henry Adams

In a multicurrency environment you sit at a complex intersec­tion. The interplay of economics, currency markets, mathematics, official financial reporting standards, management reporting, computer science, and governmental fiscal and monetary policy all affect reported results. As it relates specifically to exchange rates, a company could see a profit turn to loss without a single change in operations simply by movement of exchange rates. Further, the calculations to determine the effect of exchange rates can be exceedingly complex.

A potentially arduous process confronts one when working within the foreign currency reporting intersection. The potential to veer off course is high, particularly when no systems or controls exist to automate and check the processes. For a mere mortal there are a large number of variables that factor into the financial reporting mix.

What variables affect exchange rates and the related financial reporting? A short list for a simple environment includes:

  • Type of account, which dictates type of exchange rate
  • The exchange rate itself
  • The currency (is it functional, transactional, functional and transactional, ...

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