Accounting Exposure involves translation risk, which occurs when convert subsidiaries financial statement in foreign currency into parent’s reporting currency. By restating the profit, we are facing the exchange risk affects the true value of the income statement. There are two ways we can choose to process the currency either using historical rate or current rate. Historical rate is the exchange rate at the time the transaction takes place while the current rate is at the point the balance sheet and income statement are prepared. Another concern with accounting exposure is how to treat translation gains and losses. Historically, there are three methods: (1) current/noncurrent method, (2) monetary/ nonmonetary method, and (3) temporal method. The problem of these methods is that they leave too much room for manipulation by giving the company the choice to record different accounts under different rates. FASB No.52 now requires translation gains or losses to be record by current rate method in separate equity account on the balance sheet. The basic rule to record the functional currency depends three criterions. First of all, if the foreign operations are independent entities operating and serving primarily for the local market, then the functional currency would be the local currency. Secondly, if the subsidiaries serve as a sale outlet for parent company to unload inventory, then functional currency should be parent’s currency. Lastly, in the case of countries with hyperinflation, it makes sense to have parent’s currency as the functional currency. In conclusion, the current rate method has the advantage of eliminating the variety of net earnings arises because of the translation exposure, and it keeps the relative proportions of the balance sheet unchanged. However, the biggest disadvantage of this method is that it violates accounting principle that we should carry items in the balance sheet at the historical cost as it incurred.   http://flash.lakeheadu.ca/~pgreg/assignments/4079chapter10n.pdf