There are four principal translation methods available in order for multinational corporations to protect their assets and liabilities from translation exposure. Translation process has an effect on net investment upon sale or liquidation of the assets.

When a U.S. multinational corporation has a parent-subsidiary relationship with a foreign company the parent company is usually required to prepare consolidated financial statements. The financial statements of the foreign subsidiary must be redone using the U.S. generally accepted accounting principles (GAAP). The foreign accounts must be translated from the foreign currency into U.S. dollars. To make the translation, the first step is to identify three currencies:

The Statement of Financial Accounting Standards 52 (henceforth FASB 52), is a ruling which was approved due to dissatisfaction with a previous ruling (FASB 8) about methods of translation and how they should be reported by companies. In FASB 8, it is declared that translation should occur on the income statement. However this led to an extremely unreliable net income for the parent company. In order to fix this problem, FASB 52 established a set of standards which more accurately represented a firm’s profitability.

Accounting exposure, also know as translation exposure, results from the conversion from subsidiary to parent currency when preparing the financial statements. The process that causes the accounting exposure is consolidation from subsidiaries to the parent company. Both the transaction risk and translation risk contribute to the accounting exposure in international operations.