Yo-Yo Effect

Summary of Yo-Yo Effect

A condition that arises under the rules of Financial Accounting Standards Board Statement No. 8 (read this and related legal terms for further details) when a foreign company’s total monetary assets differ from its total monetary liabilities. Specifically, FASB 8 requires that nonmonetary assets (e.g., plant and equipment) be translated at the historical rate, i.e., the exchange values in effect at the tíme assets were acquired. Monetary assets and liabilities, such as cash, receivables, payables, et cetera, are converted as current exchange rates.

Inasmuch as exchange rates are fluctuating con-tinuously, and different rates are used in translating monetary and nonmonetary items, a yo-yo effect may occur in valuing a company’s foreign position. Changes in value resulting from exchange rate fluctuations are incorporated into the firm’s income statement as a gain or loss.

See also Financial Accounting Standards Board Statement No. 52.

(Main Author: William J. Miller)