FX or Foreign Exchange Translation Adjustments are increasingly important in today’s corporate accounting world. It is no longer a problem of comparing “apples to oranges,” and applying a relatively stable exchange rate between countries at a relatively slow pace. If produce is used as a metaphor, it is more of a “fruit salad” where one bad piece could spoil all of the economies that touch it. On the other hand, great profits can be realized by companies that succeffully balance prudence with taking advantage of shifts in their Foreign Exchange Translation Adjustments.
Foreign Exchange Translation Adjustments are judged as two types, Transaction Risk that has to do with transactions denominated in a foreign currency and Translation Risk, which evaluates net assets denominated in a foreign currency. The following table shows Verizon Corporation’s Foreign Exchange Translation Risk for the years 2009, 2010 and 2100.
This table indicates there was a net asset gain of 78 in the year 2009 followed by net losses in the following two years. In 2010, there was a 5 point gain that that resulted in a negative Fx Translation Adjustment loss of 171. In 2011, there was a 9-point Fx loss that resulted in a smaller negative 119 point Fx Translation Adjustment. These accounting adjustments on net values are computed by a comparison of the U.S. dollar against the euro, the British pound sterling and the Japanese yen. While these accounting risks are computed using “business units’ they do not necessarily mean an independently held unit and can incorporate the values of subsidiaries, branches and equity investments along with separate legal entries.
Like the Fx Transaction Risk is that computed regarding transactions and also depends upon currency values, the assets accounted for in the Fx Translation Risk can retain their original value in the currency used when they were purchased. The value adjustment is made based upon the value of that currency when compared to currency values from other governments. This makes these adjustments increasingly valuable, and volatile, in today’s global marketplace.
Franklin, Benjamin. Classic American Autobiographies. Ed. William L. Andrews. Signet Classics, n.d.