Report Number

1993-106

Abstract

Beaver and Wolfson (1982 BW) identify economic interpretability and symmetry as desirable properties for financial statement translation. They then analyze translation methods with respect to these properties assuming perfect and complete markets between and within both countries (referred to, here, as the integrated economics case). This study extends BW's analysis by examining isolated economics characterized by perfect and complete internal markets and a random relationship between prices and exchange rates. In BW's integrated economics case, inflation differentials drive exchange rate changes. No exchange rish exists, although monetary assets are exposed to the risk of unexpected inflation. Isolated economies expose monetary and nonmonetary iteem to both exchange and inflation rish. In both cases, economic interpretability and symmetry can be achieved only by current value accounting translated at current exchange rates. In the integrated economies case, symmetry alone is achieved through current value accounting translated by current excahnge rates for monetary items and historical costs translated by historica rates for nonmonetary items. In the isolated econmies case, symmetry alone is achieved through current value accounting for monetary items and historical cost for non-monetary items, all translated at the current rate. In both cases, including translation gains or losses in income is a condition for these results. This extension of BW demonstrates 1) the translation rate required for symmetry depends upon the assumed relationship between prices and exchange rate, 2) a well-defined economic scenario exists where historical cost accounting using current rate translation results in symmetry, and 3) the results dependon including translation gains and losses in income.

Keywords

Financial market

Date of this Version

1-1-1993

Share

COinS