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F. When incorporating, it is important to consider whether or not the company’s business deals internationally....

F. When incorporating, it is important to consider whether or not the company’s business deals internationally. 1. Summarize the impact of foreign exchange rates on the company’s financial statements. What risks do foreign exchange rates pose? 2. What are the two methods used to translate financial statements and how does the functional currency play a role in determining which method is used?

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a) Determination of functional currency and reporting currency of the parent company b) Determination of the appropriate exchange rate to be used c) Determination of translation method d) Treatment of exchange differences of translation in the financial statements ethods of Foreign currency translation a. Multiple Rate Approach: i. Current-Non Current method ii. Monetary-Non Monetary method ii. Temporal Method b. Single Rate Approach i. Current (Closing) Rate method ethod is used? SFAS 52 introduced the concept of functional currency, which is a new feature in the translation literature. The development of SFAS 52 was not an easy task The problems arising out of implementation of SFAS 8 did not have clear-cut solution:s The suggestions for the changes in SFAS 8 ranged from minor changes to a major rethinking of the entire process of translation. Finally, after much debate, it was decided to go in for a major rethinking and SFAS 52 was adopted by the FASB The minority view strongly supported SFAS 8 and could not accept the changes inherent in SFAS 52 (Arpan and Radebaugh, 1985). However, SFAS 52 is now the effective standard in the US and American accountants are obliged to apply it until any further change In spite of the issuance of the new standard, it is unlikely that the controversy relating to the translation of financial statements will go away. SFAS 52 has not necessarily simplified the translation process and all problems which occurred with the implementations of SFAS 8 have not found their solutions It must be remembered that SFAS 52 does not only prescribe the current rate method but encompasses both the current rate method and the temporary method. The Situational Approach behind this flexibility is to give a chance to the management to exercise judgment in determining the functional currency of the foreign subsidiary and then determining the translation method to be used accordingly

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