When accounting for foreign operations, companies prepare their financial
statements using local currency and accounting standards. However, when preparing consolidated financial statements, parent companies must report using the currency and standards of their home country. This requires parent companies to restate and translate their foreign subsidiaries' financial statements into the proper reporting currency. The effect of this is often referred to as translation (or accounting) exposure. The translation of financial statement items between foreign currencies will result in foreign exchange gains or losses, depending on the rules used. These gains and losses do not involve actual cash flows; they are only changes "on paper." When translating foreign currency financial statements, international accountants predominantly use one of the following four methods: current/noncurrent method, monetary/non-monetary method, temporal method, and current rate (also called closing rate) method. Companies choose among these methods based on reasons such as their objectives, ease of use, applicability to their company, and frequency of use by other companies in their industry.
Select one of the four methods of currency translation. Consider the impact of your selected foreign currency translation method on translation exposure and international financial reporting. Think about whether there should be authoritative rules mandating which translation method to use and where the translation adjustment should be reported in consolidated financial statements.