Accounting exposure, also called translation exposure, results from the need to restate foreign subsidiaries’ financial statements, which usually stated in foreign currency, into the parent’s reporting currency when preparing the consolidated financial statements. Restating financial statements may lead to changes in the parent’s net worth or net income. When converting financial statement items or transactions denominated in currencies other than the parent currency, two choices of exchange rate are possible: ?   The historical rate: the exchange rate prevailing at the time of the transaction ?   The current rate: the exchange rate prevailing at the balance sheet date or during the income statement period Conversion of financial statements into the parent’s currency creates concerns about the exposure to exchange rate changes and the treatment of translation gains or losses. There are four methods of translation: current/noncurrent, monetary/nonmonetary, temporal, and current rate. The method used to restate financial statements is based on the choice of functional currency for each subsidiary. The functional currency is the primary currency used in the subsidiary’s operations. This currency may be the foreign subsidiary’s local currency, the parent’s currency, or a third currency. There exist three categories of foreign operations: ?   Relatively self-contained: independent entities operating primarily in local markets. The functional currency of these entities is generally the local currency. ?   Significantly integrated operations: it serves as sales outlets for the parent’s products and services. The functional currency should be the parent’s currency in this case. ?   Subsidiaries operating in highly inflationary economies: the use of the parent’s currency as the functional currency is required in this case. If the foreign entity’s functional currency is the local currency, financial statements are translated using the current rate method. If the foreign entity’s functional currency is the parent’s currency, financial statements are re-measured using the temporal method.

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