Question

What was the most significant ramifications of FASB 8 and FASB 52 on U.S. business and accounting firms?

Answer 1

Before we discuss about ramifications of FASB 8 and FASB 52 on US business and accounting firms, let me explain you the concept of foreign currency translation. In simple language, currency translation is an accounting method by which an international/multinational company reports the results of its subsidiary firms operating outside of their home country by converting their results i.e profit/loss etc from foreign currency to the reporting currency of the parent company.

In FASB 8 it was said that the gains and losses resulting from the translation should be converted using temporal method and should be included in income for the period. To clarify more temporal method of translation means assets and liabilities are converted at historical rates as opposed to current exchange rates.

In FASB 52 , the concept of functional currency was introduced. It means that if the subsidiary company in foreign land is an " independent, cash generating centre" then the currency of the subsidiary has to be the local currency of the country in which it operates, except that in all other cases it has to be dollar. Here FASB 52 states that the translation has to happen using "all current " method , which means the gains/losses etc have to be translated using the current prevailing exchange rates which are dynamic in nature and keep on changing from time to time as opposed to historical rates(temporal method) in FASB 8. Moreover translation gains and losses are not reported in income statements but in owner's equity as "translation adjustments". The income statement items i.e revenue/expense etc are translated at the rates which prevailed  when they were respectively recognized.

The effect on the accounting firms/ US business is situational in my point of view and nothing can be generalized, it can have both positive and negative side effects. For ex:

a) If the local currency in which the subsidiary operates is dollar, then naturally there will be minimal fluctuations in the income statements and balance sheets while translation but if the currencies are different and have high fluctuations then there can be major profits/losses due to translations.

b) Now lets analyse another situation wherein while translation process following rules of FASB 52 , the historical cost items get converted at current rates i.e. lets assume a machinery has a historical cost gets converted at current rates which is quite meaningless and does not give a proper picture of past and future cash flows and the funny part is that these seemingly meaningless balances need to be consolidated with the parent company's account.

Hope this helps!