In all the methods of currency translation, the exchange rates are specified with the FS items in light of how the translation differences are made and how rounding differences are to be handled.
Comparing and Contrasting the 4 Currency Translation Methods
The four main currency translation methods are: The Current Rate Method; the Monetary/ Nonmonetary Method; the Current/ Noncurrent Method; and the Temporal Method. In the Current/Noncurrent Method, the translation of assets and liabilities is done on the basis of their maturity. This is the underlying principal. Similarly, while current assets are translated at spot rate, noncurrent assets are, but at historical rate (when the item in point was originally recorded in the books of accounts). In the Temporal Method, the governing principle is that all assets and liabilities are to be translated, according to the manner in which they were carried on the firm’s books of accounts. In the current rate method, cumulative translation adjustment is imperatively used in making the balance sheet balance and the balance sheet items are translated at the current rate of exchange (Beaver, 2002).
The 2 methods used by FASB 52
The two methods used by FASB 52 are temporal and current rate methods. In the 2-step method used in FASB 52, there needs to be the accounting for the original sale in American dollars; and the accounting for profits and/ or losses from the fluctuations in the exchange rate.
Handling Inflationary Economies
Highly inflationary economies (around 100% inflation in a 3-year period) can be handled by controlling the borrowing and lending rates. The borrowing rate should be one that is favorable enough to ensure the growth and stability of investments, and strict enough to benefit crucial institutions, with specificity being given to time. The government may also inject economic values to keep crucial institutions and investors in operation (Doupnik, 2007).
Discussing How Japan and Germany Approach the Translation of Currency
Japan and Germany approach translation of currency by following the Monetary/Nonmonetary Method and the Temporal Method, since the two methods give identical results and are amenable to GAAP agreements (Herrmann and Thomas, 2005).
The US Changing its Translation Method
There is no need for the United States to change its translation method to match that of the European Union since the US dollar is also used as common currencies in many countries which are mainly in the commonwealth. Similarly, the US is not a member of the EU.