The stated accounting policy treatment for foreign currency translation for SKF, a Swedish company, before it adopted IFRS was as follows:
Translation of foreign financial statements The current rate method is used for translating the income statements and balance sheets into Swedish kronor as the majority of subsidiaries are considered independent.
All balance sheet items in foreign subsidiaries have been translated into Swedish kronor based on the year end exchange rates. Income statement items are translated at average exchange rates. The translation adjustments that arise as a result of the current rate method are transferred directly to shareholders’ equity.
For the translation of financial statements of subsidiaries operating in highly inflationary economies, the Group applies the monetary/non-monetary method (MNM method). Monetary balance sheet items are translated at year end exchange rates and non-monetary balance sheet items, as well as related income and expense items, are translated at rates in effect at the time of acquisition (historical rates). Other income and expense items are translated at average exchange rates. Translation differences that arise are included in the related lines in the income statement.
Translation of items denominated in foreign currency Transactions in foreign currencies during the year have been translated at the exchange rate prevailing at the respective transaction date.
Accounts receivable and payable and other receivables/payables denominated in foreign currency have been translated at the exchange rates prevailing at the balance sheet date. Such exchange gains and losses are included in other operating income and other operating expense. Other foreign currency items have been included in financial income and expense net.
Write a brief memorandum, in non-technical language, explaining the meaning and significance of these policies.