Critical Elements of Foreign Currency Translation: A Worldwide Informational and Accounting Problem

The purpose of this study is to describe and clarify the foreign currency translation problem and to suggest normative criteria by which various methodologies can be tested. The translation problem is presented as a set of four critical questions: (1) whether translation should be done, (2) what numbers to use to translate foreign currency accounts into the reporting currency, (3) what to do with the imbalance that results from translating different accounts with different numbers and (4) what, if anything, to do about changes in price levels. Several normative criteria are recommended for evaluating of various translation methodologies, some related specifically to earnings quality. It is further suggested that when empirical research is done to test various translation methodologies against normative criteria, (1) no translation at all and (2) price parity methodologies should also be tested.