Foreign Currency Translation
The translation of foreign currency is an issue that many accountants face in an increasingly international environment. Where a company has operations or entities located in different countries around the world, there is a need for the translation of foreign currencies. There is a problem however, which relates to the comparability of financial statements compiled in different countries. This is as many countries operate under different accounting standards. However there has been a move towards harmonising the accounting standards of different countries with the international accounting standards. This report looks at foreign currency translation, and how the issue is treated by Australia, the United Kingdom, the United States of America, Germany, Japan and China. The international standards relating to this area will also be covered. The impact that any diversity in required practices of different countries has on the overall comparability of financial statements. The moves being made by the International Accounting Standards Board, and other groups, to eliminate these diversified practices will also be examined. With increased globalisation, and many companies ope . . .
rating, or controlling, entities in multiple countries there is an increased need for the translation of foreign currency into the reporting currency in order to prepare financial statements. However investors will not place their money in a company unless they are sure about the continued viability of that firm. Although the accounting standards used are similar, there are differences, whether major or minor, that still pose a problem for the comparability of the financial reports internationally. China Financial reporting in China is governed by the Ministry of Finance (MOF) and the China Securities Regulatory Commission (CSRC). These financial statements must be translated in order for the entity to be consolidated into the parent companies financial statements. Following this AASB 1012 will become AAS 21. Monetary assets can be translated either by the historical rate, where there is no gain or loss from currency translation, or the closing rate, where any differences between the closing rate and the historical rate are conveyed to the profit and loss account . Translation of foreign currency means that the amount is simply restated in terms of another, without actually changing the currency. Conclusion Although, at present, the countries discussed in this report use different accounting standards, they are all very similar, and based on either the international standard or the United States standard. This leads investors to have a lack of confidence as to the accuracy of the financial statements, and they will not invest. This standard states that for balance sheet items the closing exchange rate is to be used, while items on the income statement use the average rate. The FASB issues Statements of Financial Accounting Standards (SFAS). It is here that a lack of comparability of accounting standards becomes a problem. This move will still provide a greater measure of comparability of financial statements across international borders, which will greatly help the users of those reports, namely investors, creditors and other stakeholders. Japan The Accounting Standards Board of Japan (ASBJ) implements financial accounting standards that govern how an organization accounts for foreign currency translation.
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