EFFECTS OF ALTERNATIVE FOREIGN CURRENCY TRANSLATION METHODS ON DIVISIONAL ROI MEASURES

Managerial implications of procedures used to translate foreign currency accounts are receiving renewed interest due to continuing instability in foreign exchange markets and increased levels of foreign trade and international investment. By use of a simulation model, foreign currency translation methods are analyzed for suitability in appraising foreign affiliate performance.;Results indicate that translated ROI is not affected by a foreign currency translation method alone. Translated ROI is affected by other factors such as subsidiary financial structure, type of operations, company policy, and by movement of exchange rates.;The temporal method generally generates significantly greater deviations from the criteria than any other tested method, while the all-current method generally generates significantly smaller deviations from internal criteria than other translation methods.;In conclusion, no single translation method is appropriate or superior in all circumstances. However, the relationships that exist in local currency terms will remain unchanged after the translation if one uses the all-current method. This method also has the extraordinary advantage of being simple to apply. At this time the current rate method seems to be the best method for translating foreign currency financial statements for purposes of internal evaluation.;The study reviews recent monetary events, objectives of translation procedure, parent versus local perspective in translation, and the theory and justification behind each major translation method. Analysis of the nature of managerial accounting problems in multi-national companies (MNC) and of current practice of foreign affiliate performance measurement reveals that the majority of the MNC's use return on investment (ROI) to measure foreign subsidiary performance. Translated ROI for a 12-year period was selected as the output of the simulation model constructed for this study. The computer simulation model investigated ROI's for 16 model foreign subsidiaries with different financial structures and types of operations involving seven different types of exchange rate movements. These ROI's were analyzed to evaluate effects of each of four translation methods. The resulting ROI's were then compared to the internal rate of return chosen as the criteria to determine which translation method reports a ROI most compatible with this criteria.