Historical Changes of Accounting for Traslation of Foreign Currency Financial Statements

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The subject of accounting for the translation of foreign currency financial statements has been widely researched since 1965. Much of this research to date, both empirical and theoretical, has been motivated by a recognition of the effect of foreign exchange fluctuation and translation adjustment. Currently, the Situational Approach is accepted in the field of international accounting worldwide, though this approach may not always be suitable.The purpose of this paper is to consider two problems with the Situational Approach. First, the relevant comparative accounting literature with historical perspectives on the subject is very limited. Second, there are differences between the Situational Approach in the U.K. (Type A) and that in the U.S. (Type B). (Table 1)The reason for these differences may exist due to a change of logics between them. This paper discusses these differences from a historical perspective (especially from 1968 to 1975). At present, the Current-Rate Method (Type B) is the best method of translating foreign currency financial statements. It is useful to recognize the effect of foreign exchange fluctuation from the standpoint of the parent company concept, as the independent foreign subsidiary is only part of the parent company's investment. Therefore, the translation adjustment incurred from translation by the Current-Rate Method should be included in net income.This paper reviews 19th century evelopments in methods of reporting the financial results of foreign business operations used by accountants in the UK. It shows that many of the methods of foreign currency translation which have been proposed by accounting regulators have a common origin in one method first developed in the 1890s. Moreover, while the methods proposed by accounting regulators have been applied to the translation of financial statements of foreign operations, the method from which they were derived was designed as a valuation technique. This technique was used for reporting the net monetary position of foreign operations, in order to identify the extent of profits available for distribution. (Table 2)In conclusion, there is a need for research with historical perspectives tobe considered when setting international accounting standards. Further, even if accounting standards are different, the disclosed translation adjustments should be mutually recognized.

Historical Changes of Accounting for Traslation of Foreign Currency Financial Statements

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