ACCOUNTING RESOURCE (CURRENCY) TRANSLATION: A COMPARATIVE ANALYSIS OF APPROACHES

The purpose of this study was to compare the current U.S. currency translation standard (Financial Accounting Standards Board Statement No. 8 (FAS 8)), to the new U.S. currency translation standard (Financial Accounting Standards Board Statement No. 52 (FAS 52)). The two translation standards were compared using first currency exchange rates, and then substituting purchasing power parities (PPP) for exchange rates. Thus four translation approaches were compared. The two major research questions were: (1) Is there a difference among different translation approaches with respect to preserving the net income information embodied in the foreign financial statements? (2) Is there a difference among different translation approaches with respect to the extent to which they retain the integrity of financial relationships in the functional (foreign) currency?; The methodology involved collecting quarterly financial statements of four U.S. companies for the time period 1976-1981. The companies were selected from Compustat tapes on the basis of their monetary assets to monetary liabilities structure, net income growth and inventory valuation method. The financial statements were obtained from the Security and Exchange Commission 10Q-filings. The ability of the different translation approaches to preserve nontranslated financial statements information was measured by correlation analysis.; The research led to the following major conclusions subject to constraints with respect to generalizability because of small sample size, limited range of differently structured companies and limited range of environmental conditions: (1) The FAS 52 translation approaches are preferable to the FAS 8 translation approaches. (2) The PPP-ratios translation approaches are preferable to their exchange rates counterparts. (3) The difference between the PPP-ratios approach of FAS 52 and the exchange rates approach of FAS 52 is greater (to the PPP-ratios approach's advantage) for high net income growth companies than for low net income growth companies. (4) The translation approaches investigated generally perform better for low net income growth companies. (5) The FAS 8 exchange rates translation approach's performance is not only poor but also inconsistent. (6) The good performance of the PPP-ratios translation approaches deserves more research attention.