Foreign Operation Issue in Accounting View

Topics: Balance sheet, Exchange rate, Asset Pages: 6 (1934 words) Published: November 30, 2011
* Currency issue in foreign operations.
Currency issue in foreign operations was arise since 1891 when it faces by an accountant in UK when they had realise that the issue underlying the identification of a foreign currency in accounting treatment problem and so many criticism about the development of a solution towards this problem. A development of the solution towards this problem has developed on 19th century, at the first regulators show that the foreign currency translation method which are treated as separate method can be traced to one common method, on 1960s this method has replaced by others solution by accounting practices and all of the solution has experience by so many problem that will arise issue in foreign currency operation in accounting treatment. Based on Dukes (1978), there have two questions that being a problem in any method for the translation of the financial statement of foreign business operations. It consist of, (i) How foreign currency in financial statements shall be translated and in what exchange rate are to be used for different asset, liabilities, and equity accounts? (ii) How and when foreign exchange gains or losses shall be recognized? These two questions are based on the assumption that financial statements can be used to identify the extent to which foreign business operations is exposed of the gain and any possibility of loss from foreign exchange rate movements. The problem in the first question involves an assessment of the risk in the possibility of loss from specific asset and liability balances which was designated in foreign currency. The decision in accounting treatment to re-translate asset and liability balances follow by exchanged rate fluctuations which assume that the movement in exchanged rates are significant measure to evaluate the balances of asset and liability value of foreign business operations. Otherwise the decision not to re-translate the value of asset and liability balances of foreign business operation based on the exchange rate movements, it will indicates that those asset and liability balances are not considered to be subject to the exposure of the possibility of loss from exchange fluctuations. While the problem in the second question that will arise issue in foreign operation business deal with the accounting exposure that likely to result in actual business loss. This issue is how to treat the gains or losses exist from exchanges rate differences. Where the foreign exchanged difference can exist as profit or loss for the foreign business operation and it will affects the size or total of reported profit in their financial statement and subsequently this profits will distributable to the shareholders as dividends. Otherwise, if the decision to transfer the difference exist directly to a reserve which state in balance sheet reporting it will does not affect the profit distribution. However, the determination of any gains or losses from exchanged difference depends on which asset and liabilities are deemed to be at the risk of loss. The determination of size and direction on any exchange difference depends on the choice of translation method that being used. The consequence as either the part of the profit and loss or reserve is strictly independent of choice of foreign currency translation method. Since 1931, there have several method of solution that had been discovered to solve the problem in currency issue of foreign business operation which is developed by US Accounting Regulators. Among of the method of solution are the current-noncurrent, monetary-nonmonetary, temporal, and closing rate method of translation. However all of the solutions meet a different assumption about the nature and significance of foreign currency accounting exposure. The Current-noncurrent and monetary-nonmonetary methods require to use of mixture the closing and historical rate of exchange in order to make a translation of foreign currency. While the...
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