Businesses all over the world are operating in a global environment. Their operations are not limited to one country but rather spread out over continents. This introduces new challenges for accountants all over the world. Disparities in exchange rates may produce different financial results. In order to deal with this problem, FASB offered guidelines in its Statement No. 8, issued in October 1975, “Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements.
” But the guidelines lacked in many areas and therefore in order to fill the gaps FASB issued Statement No. 52,”Foreign Currency Translation” which was issued in December 1981. Guidelines given under this statement fix the shortcomings of its predecessor.
Foreign currency translation is very important in order to project a company’s financial results accurately. Otherwise many distortions may occur due to fluctuations in the foreign exchange market or in the foreign exchange derivatives market.
FASB guidelines give us procedures and standards, which are supposed to do away with such distortions.
But these guidelines have their shortcomings. For example if there is high economic instability in the form of inflation or some other macroeconomic variable, these may fail to achieve their desired objective of accurate financial reporting. Furthermore accounting information does not take into account the uncertainty factor. The uncertainty of future cash flows etc. Accounting information is supposed to be helpful for investors, creditors etc.
In the absence of such economic factors being taken into account, the picture is anything but 100% accurate. Therefore in case of high economic instability, foreign currency translation no longer provides an accurate reflection of a firm’s financial results.
References Lease Accounting: FASB 52. Retrieved May 15, 2010, from ExecutiveCaliber Web site: http://www. executivecaliber. ws/sys-tmpl/fasb52/ Denis Guithues, Amrhein. (1994). Reporting of foreign currency translation. Retrieved May 14, 2010, from BNET Website: http://findarticles. com/p/articles/mi_qa3674/is_199404/ai_n873275
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