Lloyd's Maritime and Commercial Law Quarterly
LOSSES IN TRANSLATION— SOME PROBLEMS WITH FOREIGN EXHANGE: PART I—ACCOUNTING
Derrick Owles
Visiting Fellow in American Business Law at City University Business School.
When a business completes a transaction in a foreign country there is a commercial risk that a loss will be recorded when the proceeds are converted into the home currency, but there are no legal or accounting problems. When a transaction is not completed at the end of the financial year the amounts in foreign money have to be translated into the home currency for balance sheet purposes, and it is then that problems arise. When the rate of exchange between the relevant currencies is stable, no serious difficulties have to be solved, and a mechanical application of the rules by accountants is all that is required. Stable currencies, however, are not all that common in present-day conditions, especially when one of the currencies is the United States dollar. Losses and gains are produced by uncontrollable currency fluctuations, and managements have to find the answers to two problems:
(1) How to show the fluctuations in their financial statements; and
(2) How to avoid income tax complications.
These answers will depend on local law and regulations, and will probably be different for a Japanese company, for instance, than those adopted by a U.S.-based company. A multinational company, with subsidiaries in many parts of the world, has to reconcile all the various rules with the requirements of its home country, and since many multinationals are based in the U.S., it is convenient to look at the problems from the point of view of an American company. Unhappily, those companies based in other parts of the world are not entirely satisfied with the American solutions.
The accounting problem
In the U.S., as in most other countries, the management of a business does not have complete freedom in its choice of accounting procedures. It has to ensure that its financial statements are prepared in accordance with generally accepted accounting principles (known familiarly as “GAAP”). This means that the statements must comply with the rules laid down by the Financial Accounting Standards Board. This is not a Government body, but an organisation set up by the American Institute of Certified Public Accountants, and financed by voluntary contributions from both industry and the accounting profession. It owes its existence to the accountants’ desperate need to avoid Government control of their profession, which has been
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