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

The purpose of this study is to describe and clarif y the foreign currency translation problem and to s uggest normative criteria by which various methodologies c an be tested. The translation problem is presented as a set of four critical questions: (1) whether transla tion should be done, (2) what numbers to use to tra nslate foreign currency accounts into the reporting curren cy, (3) what to do with the imbalance that results from translating different accounts with different numbe rs and (4) what, if anything, to do about changes i n price levels. Several normative criteria are recommended for evaluating of various translation methodologies , some related specifically to earnings quality. It i s further suggested that when empirical research is done to test various translation methodologies against norm ative criteria, (1) no translation at all and (2) p rice parity methodologies should also be tested.