diction. Of course, the temporary difference actually reverses in the buyer’s tax ju-
risdiction when the buyer sells (or uses) the asset. For example, if the sale proceeds
equal the buyer’s tax basis, then for book purposes the buyer realizes the deferred
gain and the associated tax benefit of the temporary difference. Conceptually, since
the tax basis of the asset is deductible in the buyer’s tax jurisdiction, the buyer’s tax
rate is a better measure of the tax consequences of the temporary difference. But if
the temporary difference is set up at the buyer’s tax rate, any difference between the
tax rates of the seller and the buyer would result in a credit or debit in the income
statement in the year of sale, despite the fact that the gain was unrealized for book
purposes. Under the revised IAS approach, the temporary difference would be meas-
ured at the buyer’s tax rate. This approach was previously adopted in the United
States under SFAS No. 96, “Accounting for Income Taxes,” but was ultimately re-
jected when SFAS No. 109 replaced SFAS No. 96 in 1992. Under SFAS No. 109, the
tax effect of the intercompany profit is measured at the seller’s tax rate. The FASB
referred to this issue as giving rise to a “conflict of concepts” and decided to prohibit
recognition in the buyer’s tax jurisdiction. The weight of technical and practical is-
sues makes it easy to see how different standard-setters could reach different conclu-
sions on this matter.
The area of income tax accounting clearly illustrates the difficulty of harmonizing
standards among different countries when the economic substance of the event is
similar across all countries but the standards were determined at different times, by
different groups of people, that had different objectives and constituencies to satisfy.
Conversely, the issues described in this section also illustrate why greater coopera-
tion between the major standard-setting bodies and the IASB (e.g., on joint projects)
may provide a forum for a reduction of unnecessary differences.
(g) Foreign Currency Translation. Enterprises that operate in more than one econ-
omy and engage in businesses in currencies other than the currency in which they
present their financial statements are confronted with the issue of how to address the
effects of fluctuating currency exchange rates in their financial statements. These
companies must present their financial statements in a single currency as the common
denominator. The fundamental questions that arise in accounting for changes in for-
eign currency exchange rates are which exchange rate (current or historical) should
be used to translate the statements of foreign subsidiaries, or assets or liabilities de-
nominated in foreign currencies and how gains and losses arising from these foreign
currency translations should be accounted for. With the recent trend toward an in-
creased level of international business, it is no wonder that the issue of foreign cur-
rency translation has increased importance.
There are essentially two methods that are used to translate statements denomi-
nated in foreign currencies. The first method is the current rate method. Under this
method, assets and liabilities are translated at the rate current at the balance sheet
date, with the adjustment recorded as a direct charge or credit to equity. For income
statement items, the weighted-average exchange rate for the period is used. Examples
of countries whose accounting rules generally apply this method are the Netherlands,
the United Kingdom, and the United States. Recognizing the effects of translation
gains and losses on investments in foreign subsidiaries as a direct adjustment to eq-
uity avoids cluttering net income with an unrealized gain or loss that has remote and
uncertain effects on future cash flows. In a recent development, the United Kingdom
has introduced a statement of gains and losses that provides a measure of compre-
12.6 FINANCIAL STATEMENT EFFECTS 12 • 19