Accountors, Accountants, and Standard No. 8
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* Ithas been two years since the FinancialAccounting Standards Board issued its contro- INTRODUCTION versial Standard No. 8.1 This pronouncement replaces a variety of "generally-accepted" foreign currency translationmethods and now requires that companies adhere to the "temporal" principle of foreign currency translation. Under this provision, all assets carried on foreign statements at historical cost-including inventories in conformity with the lower of cost or market rule--are translated into U.S. dollars at rates of exchange which prevailed when the assets were originallyacquired (historicalrate); assets carried at current values (cash, receivables, and payables) are translated at the current rate. The most critical element in the entire foreign currency translation process relates to the treatment of translation "gains or losses"; i.e., increases or decreases in the dollar equivalents of foreign currency balances due to fluctuations in the translationrate between reporting periods. On this point, Standard No. 8 disallows the use of balance sheet reserves to "level-out" the impact of fluctuatingexchange rates on periodic earnings and requires that such translation generated adjustments be reflected directly in income in the period in which they occur.
Initialreactions to Standard No. 8's formal release have reportedly been unfavorable. PURPOSE OF Some business critics, notably financial executives of multinationalenterprises, contend PRESENT that the new rule introduces greater volatility in reported earnings and, thus, depresses SURVEY * Dr.Choiis AssociateProfessorof Accountingand Finance,Universityof Hawaii. Hisresearch interestscenteron international referenceto the PacificBasin. accountingand financewithparticular He is co-authorof An Introduction to Multinational Inc., 1978). Accounting(NJ:Prentice-Hall, * ProfessorLoweis Chairmanof the AccountingDepartment,University of Hawaii. He has had assignmentswhichhave kepthimin foreigncountriesa totalof seven yearsand his researchinterests are in financialaccountingand international business. *** Dr. Worthleyis AssociateProfessorof DecisionSciences, Universityof Hawaii. Hisresearch interestsencompassexperimentaldesign and nonparametric statistics.
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share prices. Others argue that it forces companies to engage in activities that are contraryto sound business practice.2 One writerhas even gone so far as to speculate that Standard No. 8 has produced adverse effects on the national economy and international business scene by curtailing the foreign investment activities of U.S. multinationalsand distorting the allocation of resources for a given volume of investment.3 These unfavorablereactions present some unanswered questions. Do such reported reactions simply reflect the opinions of a vocal minorityor do a majorityof financial executives (accountors) feel this way? How do professional accountants feel about
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