Differences between FASBs 8 and

The underlying assumption of FASB 8 was that consolidated financial statements should reflect the transactions of the consolidated group as though all operations, including foreign operations, were extensions of the parent's domestic operations. This premise failed to recognize the fact that in many cases the operations of foreign subsidiaries exist in other environments and involve foreign-currency cash flows in those other environments. Thus, the results of accounting after translation did not correctly portray the foreign-currency cash flows.

FASB 52 is intended to portray foreign-currency cash flows. Companies using the functional currency approach and the current-rate method can maintain compatible income and cash flows before and after translation. Financial summary indicators, such as profit margin, gross profit, and debt-to-equity ratio, are almost the same after translation into the reporting currency as they are in the functional currency. In addition, the volatility of a company's reported earnings should be reduced under FASB 52, because its foreign-exchange gains or losses are placed directly in stockholders' equity rather than in income.

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