Notice that the value of the equity has gone down by $125, even though net income was exactly zero. Despite the fact that absolutely nothing really happened, there is a $125 accounting loss. How to handle this $125 loss has been a controversial accounting question.

One obvious and consistent way to handle this loss is simply to report the loss on the parent's income statement. During periods of volatile exchange rates, this kind of treatment can dramatically impact an international company's reported EPS. This is a purely accounting phenomenon, but, even so, such fluctuations are disliked by some financial managers.

The current approach to handling translation gains and losses is based on rules set out in the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 52 (FASB 52), issued in December 1981. For the most part, FASB 52 requires that all assets and liabilities be translated from the subsidiary's currency into the parent's currency using the exchange rate that currently prevails.

Any translation gains and losses that occur are accumulated in a special account within the shareholders' equity section of the balance sheet. This account might be labeled something like "unrealized foreign exchange gains (losses)." The amounts involved can be substantial, at least from an accounting standpoint. For example, IBM's December 31, 2000, fiscal year-end balance sheet shows a deduction from equity in the amount of $217 million for translation adjustments related to assets and liabilities of non-U.S. subsidiaries. These gains and losses are not reported on the income statement. As a result, the impact of translation gains and losses will not be recognized explicitly in net income until the underlying assets and liabilities are sold or otherwise liquidated.

Basics Of Forex

Basics Of Forex

Insider Techniques To Profitable Forex Trading. In any business or moneymaking venture, preparation and foreknowledge are the keys to success. Without this sort of insight, the attempt to make a profitable financial decision can only end in disaster and failure, regardless of your level of motivation and determination or the amount of money you plan to invest

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