When a company has international operations, there will be foreign-currency denominated assets and liabilities, revenues and expenses; meaning that the company’s financial report will be affected by the exchange rate changing. But because home-country investors and the entire financial community are interested in home currency (HC) values, financial statements from these multinational corporations’ overseas subsidiaries must be translated from local currency (LC) - country from where all revenues and expenses come to home currency – country where it is headquarter, before its financial information is consolidating with the parent’s financial statements. There are four translation methods available: current/noncurrent method, the monetary/nonmonetary method, the temporal method, and the current rate method. Current/noncurrent method tells us that all the foreign subsidiary’s current assets and liabilities are translated into home currency at the current exchange rate. Then each noncurrent asset or liability is translated at its historical exchange rate. Monetary/nonmonetary method tells us it differentiates between monetary assets and liabilities, those that represent a claim to receive, or an obligation to pay, and nonmonetary are those physical, assets and liabilities. Monetary samples are cash, accounts payable, and receivable, nonmonetary are inventory fixed assets, and long term investments. The Temporal method is similar to the monetary/nonmonetary method except that under the temporal method inventory is usually translated at the historical rate. Current rate method tells us that all balance sheet and income items are translated at the current rate.

Looking at these four methods I could say that IBM could use the current rate method to its benefit. IBM is a multinational corporation (MNC) and has sales professionals in over 170 countries. An example found in the Financial Times website says that IBM is planning to boost buy-backs. An idea for IBM to increase its profits is to sell in Europe since their rates are lower, and translate the profits to US dollar since the rates are higher. Assuming that there are sales going on in Europe we can see that the balance sheet and income statement will be translated to represent the current rate from euro to dollar. Although there will be fewer sales because the euro value is less, sending these financial reports to New York headquarter will show a higher profit because of the translation in current rate. However, it will also show less purchasing power in Europe, but gains in USA dollar translation.

We will see fewer sales in euro, but it will benefit the transaction from euro to dollar. When rates are high it is convenient to use the current rate. It will allow showing increases in the financial reports.

References:

http://www.ft.com/cms/s/f1ffc754-c32b-11de-8eca-00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Ff1ffc754-c32b-11de-8eca-00144feab49a.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fus