Paul E. Holt, Gonzalo Rivera Jr.

Abstract: The study presents the historical and theoretical underpinnings for the use of a price parity (PP) time series instead of market-generated exchange rates for foreign currency translation and relates these foundations to concepts of earnings quality. PP constructs generate a time series which is closer to the equilibrium exchange rate time series, and its use in translation of foreign accounts results in consolidated financial statements of multinational companies which are more decision useful. There are a number of possible methods for generating the PP series. The current study describes a method that is practical for application in accounting.

Key words: foreign currency translation; price parity; quality of earnings