Potential pitfalls

Accounting for the fact that business is carried out in different currencies should
not be difficult, but it is probably the greatest single cause of accounting faults
causing unwanted risk in trading houses today. This may be because it is an area
where mark-to-market accounting involves a very different approach from typical
historical-cost accounting and most accountants find it very difficult to ignore the
distorting rules they have learnt in their training for incorporating the results of
foreign-currency subsidiaries into published group accounts.
The worked examples which follow are deliberately simple and extreme, since this
is the easiest way to see the effect of different treatments. Some of the complications
which arise when considering interaction between groups of assets and liabilities are
considered in later subsections, but in this subsection we deliberately isolate individual
assets. As mentioned above, any implementation should be in a double entry
system, but it is easier to read the simpler presentation below. Many people’s
responses to these sorts of examples is ‘Of course I would never follow the incorrect
route’, but they fail to see that in real life these situations are clouded by all sorts of
other complications, and that such mistakes are being made underneath.
We start a period with 9oz of gold when the gold price is USD300/oz, and as a
result of buying and selling gold for other things end with 10 oz of gold when the gold
price is USD250/oz (for the purposes of this example assume that cash balances at
beginning and end are both zero). Few people would compute the profit as anything
other than: