The Finnish Journal of Business Economics 2/1978, 105-125.
The main theme of this paper is the computation of translation gain
or loss for translated financial statements. Also the translation
itself is discussed at length as a prerequisite of the discussion on
the translation gain or loss assessment.
We first observe how translation gain or loss can be derived from
the change that has taken place in the translated retained earnings.
Next we see how the translation gain or loss can be explained in
terms of exposure to currency exchange rates. At the same time we
can derive the components of the translation gain or loss by
utilizing aggregate transactions reconstructed from the foreign
financial statements. The components are due to the gains and losses
on the initial exposure and on the changes in the exposure, which
take place as a consequence of the intraperiod transactions.
Furthermore, we discover that the intraperiod transactions can thus
entail an operating component and a translation gain or loss
component. We also notice the similarity between the translation
gain or loss computations and the computation of price-level gain or
loss in inflation accounting. Finally, we observe how translation
gains and losses can be further subdivided into components explained
by purchasing power parity and disparity, along the lines thought
developed by Aliber and Stickney (1975) and Wyman (1976). A
numerical example is utilized throughout the presentation in order
to reach a wider circle of readers.
Keywords: financial accounting, financial statements
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