Multinational Finance, 6th Edition

Chapter 11Managing Translation Exposure and Accounting for Financial Transactions

Evolution has her own accounting system and that's the only one that matters.

— R. Buckminster Fuller

In its consolidated financial statements, a parent company with foreign operations must translate the assets and liabilities from the functional currencies of its foreign subsidiaries into the parent's reporting currency. Translation (or accounting) exposure refers to the impact of exchange rates on the parent's consolidated financial statements arising from this translation.

To set the stage, this chapter begins with a brief history of national and international financial accounting and reporting standards. Translation accounting methods are then introduced, with a comparison of the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) with the Accounting Standards Codification (ASC) of the U.S. Financial Accounting Standards Board (FASB). Reasons for and against hedging the firm's translation exposure to currency risk are then discussed. Hedge accounting for derivative instruments concludes the chapter.

11.1 Financial Accounting and Reporting Standards

Each nation has its own generally accepted accounting principles (GAAP), the peculiar set of financial accounting and reporting standards intended to promote the quality, comparability, and transparency of financial statements. These standards are in the form of rules, regulations, and interpretations ...