Accounting for foreign currency translation: Current problems in historical perspective

              Konrad W. Kubin VIRGINIA POLYTECHNIC INSTITUTE AND STATE UNIVERSITY
ACCOUNTING FOR FOREIGN CURRENCY TRANSLATION: CURRENT PROBLEMS IN HISTORICAL PERSPECTIVE
Present accounting for foreign currency translation is in a sad state. Several pressing problems have not been covered adequately by authoritative pronouncements; yet, at the same time there exists a multitude of alternative accounting principles which seriously hampers intercompany comparisons. Moreover, present translation procedures largely reflect the economic environment and political conditions that prevailed several decades ago. To overcome these inadequacies the FASB and others interested in accounting for in-ternational operations are currently striving to develop new trans-lation standards. It is the purpose of this paper to contribute to these efforts by retracing the evolution of accounting for foreign operations to gain a better understanding of the current problem. Furthermore, such a historical review lends perspective to the need for promulgating standards which are relevant to the significantly increased and still growing international business operations1 in an era characterized by fairly frequent and material changes in foreign exchange rates.
Historical Perspective of Current Practice
Bulletin No. 92 entitled "Foreign Exchange Losses" was the first official pronouncement on accounting for foreign operations. Issued in 1931 by the American Institute of Accountants, it promulgated what has become known as the "current-noncurrent translation method" with exceptions sanctioned for (1) receivables protected by forward exchange rates, (2) inventory purchased prior to a de-valuation of the foreign currency, where the net realizable value of the merchandise exceeds (as a result of inflation in that country) the dollar acquisition cost of the inventory and (3) long-term liabili-ties if the company has receivables, which are translated at the current rate, particularly where these receivables could be applied to retire the long-term debt.