On the Measurement of Foreign Income

Abstract

This essay explores some aspects of the measurement of nondollar revenues and expenses of U.S. corporations and their branches and subsidiaries.' The proposed measurement framework permits a more precise evaluation of managerial performance than is currently available. The objective is to segregate carefully the operating results of foreign divisions from their financing results which typically reflect fluctuations in foreign exchange rates. Creating an excess of revenues over expense is one aspect of managerial performance; protecting corporate assets from deteriorating currency values is a related, but separate, aspect. Both management and investors require separation of the two aspects for evaluation and decision making. Current accounting practice may report as exchange loss what is more appropriately called operating deficit. This results from a balance sheet approach to foreign exchange accounting which has changed little from that outlined by Finney in 1923 and subsequently codified by the A1CPA.2 The traditional rules, briefly stated, suggest that fixed assets, permanent investments, long-term receivables, debt, and common stock be translated