Translation Adjustment Accounting Statement Translation Adjustments for Foreign Subsidiaries

As demonstrated on the attached spreadsheet, when preparing financial statements from a foreign subsidiary of a U.S.-owned company, which will typically conduct business in a foreign currency (the domestic currency of the subsidiary's country of operation), there is a somewhat complex series of adjustments that must take place to account for currency exchange rates during the period covered by the statements. In order to meet current U.S. GAAP standards, the historic rate of exchange -- i.e. The actual rate of exchange at the time of a specific transaction -- must be used, while for other items the current rate of exchange -- i.e. The rate of exchange at the time the statements are being prepared/translated -- is preferred. To complicate things further, at times the average exchange rate for the period as a whole should be used to reflect the value of long-held assets and liabilities. Liabilities are generally translated at current exchange rates, while assets can be translated at historic or average rates. Revenue and operating expenses, which accumulate on an ongoing basis, are best translated using the average exchange rate. This is how adjustments were carried out on the provided spreadsheet, with Cash/Receivables and Supplies multiplied...

In order to bring the accounts back into balance, translation adjustments were subtracted from each date set, also in keeping with U.S. GAAP procedures.
This type of translation allows for the consolidation of accounting statements in a manner that provides real meaning to shareholder and other parties, creating consistent values that represent actual revenues, costs, assets, and liabilities to the firm in a routinized manner. These requirements for the sake of transparency and accuracy in accounting statements, and to prevent opportunities for more nebulous and nefarious foreign currency transactions as a means of "cooking the books." U.S. GAAP and IFRS policies regarding translating foreign accounts have some significant differences, however. Current IFRS policy dictates that assets and liabilities be translated at the closing exchange rate of the date the foreign balance sheet was prepared, while income and expenses are translated at the historic rate -- the rate at the date of the transaction. Instead of a translation adjustment, any resulting…