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This study uses an equity valuation model to investigate the extent to which SFAS No. 52 unrealized foreign currency translation gains and losses are reflected in levels of equity…
Abstract
This study uses an equity valuation model to investigate the extent to which SFAS No. 52 unrealized foreign currency translation gains and losses are reflected in levels of equity security prices. Equity security price is used as the dependent variable in our selected model. Book value of equity (adjusted for the cumulative translation gain or loss), earnings, and cumulative translation gains and losses are used as independent variables. Our results indicate that, generally, translation gains and losses are valued, but losses have a greater impact than gains and the value seems to change over time in setting the levels of equity share prices of USbased MNCs. On a pooled basis, the results are clearly statistically significant, although the statistical significance of the results appears to vary with the annual time period examined. Our results are consistent with the SFAS No. 52 intention that these gains and losses be treated as unrealized as the net exposure is considered long‐term in nature for foreign currency functional currency subsidiaries. Our results appear consistent with extant literature suggesting that unrealized foreign currency translation gains and losses are directly valued ‐ although not dollar for dollar ‐ in a manner similar to earnings (i.e., unrealized gains are associated with positive equity returns and unrealized losses are associated with negative equity returns).
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J. David Spiceland, Jerry E. Trapnell, Michael L. Behrens and Abdel Kablan
This article reports the results of tests used to detect shifts in the systematic risk of multinational corporations concurrent with regulations mandating new financial reporting…
Abstract
This article reports the results of tests used to detect shifts in the systematic risk of multinational corporations concurrent with regulations mandating new financial reporting requirements for foreign currency translations. Results indicate significant beta shifts, suggesting that management undertook specific suboptimal actions to counteract the effects of the regulations and that those actions were responded to by the marketplace in the form of a reassessment of systematic risk. It is further indicated that the market reaction varies according to both the location and magnitude of firms' foreign investments.
Orapin Duangploy and Dahli Helmi
Auditors nowadays must be aggressive and involved in risk assessment and analysis. This paper identifies, analyzes, and recommends a solution to a current problem in accounting…
Abstract
Auditors nowadays must be aggressive and involved in risk assessment and analysis. This paper identifies, analyzes, and recommends a solution to a current problem in accounting for foreign‐currency hedges. This is accomplished by an examination of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivatives Instruments and Hedging Activities, as issued in June 1998. Multi‐currency accounting is recommended as an alternative to functional‐currency accounting. The information generated by the multi‐currency versus the functional currency (as advocated in the SFAS 133) accounting methods for using options as hedging instruments is illustrated. Multi‐currency accounting excels in its transparency. It more clearly provides information on the respective exposure positions of the hedged items and the hedging instruments as well as the notional amounts. Auditors’ risk assessment and analysis can now be effectively performed under this system.
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Claire Eckstein, Ariel Markelevich and Alan Reinstein
The purpose of this paper is to examine the impact of firms using derivatives applying Statement of Financial Accounting Standards (SFAS) No. 133. It aims to measure the magnitude…
Abstract
Purpose
The purpose of this paper is to examine the impact of firms using derivatives applying Statement of Financial Accounting Standards (SFAS) No. 133. It aims to measure the magnitude of cumulative effects of changes in accounting principle from the income statement in the year of adoption, market reaction to earnings announcements, and key financial ratios effects.
Design/methodology/approach
Search of the Compustat Industrial database for firms reporting a cumulative effect of a change in accounting principle in their annual income statements for fiscal years ending after 15 June, 2000. We then examine the impact of firms using derivatives applying SFAS No. 133.
Findings
The sampled firms reported an absolute cumulative effect on income of $6.8 billion, 65 per cent of which was negative. Significant negative unexpected returns were observed around earnings announcement dates. Abnormal returns correlated with the cumulative effect, rather than with change in earnings per share from operations, showing that the surprise related to the accounting change. Ratio analyzes and regressions results show sampled firms with material unrealized gains and losses related to hedging with derivative instruments. Earnings‐related ratios, return on assets (ROA), return on equity (ROE) and measures of other comprehensive income decreased significantly from 2000 to 2001 after experiencing prior period significant increases.
Practical implications
The results presented in the paper should lead to further research on the effect on new authoritative standards on the financial reporting process.
Originality/value
Rather than judge SFAS No. 133's relative merits and shortcomings, the Standard's actual (rather than predicted) effects were analyzed. Focus was on the magnitude of the impact of SFAS No. 133 and the effect on key financial ratios. The impact of adopting the Standard was analyzed and it was found that it violated a basic tenet of financial accounting pronouncements: a “value neutral” basis was examined.
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Financial reporting standards on foreign currency translation in many countries such as New Zealand, US, Australia, and Canada and the international standard issued by the…
Abstract
Financial reporting standards on foreign currency translation in many countries such as New Zealand, US, Australia, and Canada and the international standard issued by the International Accounting Standards Committee require the classification of foreign operations for translation purposes into two mutually exclusive types: integrated or independent. This classification determines the translation method. In judging whether a foreign operation is either integrated or independent, the accounting standard requires the evaluation of five qualitative factors. The standard neither describes the judgement process nor identifies the relative importance of the determining factors. It has been asserted that this lack of clarity may yield dissimilar results for firms whose circumstances are similar and consequently may reduce the comparability of financial statements across firms. Using a repeated measures design, this paper examines the judgement of preparers of financial statements (financial controllers) in determining the designation of foreign operations for translation purposes. The results indicate that the relative importance of the determining factors is about equal. No support is found for the assertion that the use of qualitative factors in accounting standards results in dissimilar judgements (lack of consensus) across respondents. Further, the results show that the subjects demonstrated consistency and self‐insight in their judgements. The results also indicate that the judgements of respondents are not biased toward either classification of foreign operation. This suggests that the observed bias may be motivated by economic factors rather than the outcome of using the qualitative cues in the accounting standard. When the respondents were debriefed, several of them identified ‘managerial independence’ as another determining factor that has not been included in the standard.
This paper contends that, contrary to conventional wisdom, it may be rational to manage translation exposure. Accounting procedures for the translation of foreign currency…
Abstract
This paper contends that, contrary to conventional wisdom, it may be rational to manage translation exposure. Accounting procedures for the translation of foreign currency accounts influence the reported income of a multi‐national firm. With non‐zero agency costs, reported income impacts real costs. In such cases, therefore, it may be rational to hedge translation exposure. Empirical evidence of agency costs and the managerial tendency to report higher levels of translated income, based on the early adoption of Financial Accounting Standard No. 52, is presented.
Philip Kamau, Eno L. Inanga and Kami Rwegasira
The purpose of this paper is to investigate the impact of currency risks on the financial performance of multilateral banks (MBs). Financial performance is measured here by…
Abstract
Purpose
The purpose of this paper is to investigate the impact of currency risks on the financial performance of multilateral banks (MBs). Financial performance is measured here by after-tax accounting profitability or losses.
Design/methodology/approach
Quantitative hypothesis regarding the impact of currency risks on the financial performance of MBs was tested by a two-tailed t test for significance of the b regression coefficient.
Findings
A regression analysis was done on the total currency risk and financial performance of MBs after taking into account currency risk over eight years. The analysis of variance of the regression of the b coefficient led to non-rejection of the null hypothesis of no association, F(1, 6) = 0.77, p > 0.05. The results of the two-tailed t test on the b regression coefficient suggest that the relationship between currency risk and financial performance is statistically insignificant. Therefore, it was concluded that there is no significant impact of currency risk on the financial performance of MBs.
Research limitations/implications
The results of the study can be generalized only for MBs given their peculiar characteristics as wholesale banks, which are owned mainly by governments and are generally not listed on stock exchanges.
Originality/value
The study is of value to those interested in the multilateral banking industry. To the authors’ knowledge it is the first study providing empirical evidence on currency risk impact on MBs financial performance. The study finds that the currency risk impact on the financial performance of MBs is insignificant. The results are also useful to managers of MBs in terms of benchmarking their effectiveness in managing currency risk compared to their peers and learn from better performers. It has also policy implications in terms of justifying the current self-regulatory status, shareholder monitoring and governance of MBs as they are not significantly impacted by currency risk as it appears to be effectively managed.
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This paper aims to assess the financial performance of firms that adopted or deferred the adoption of SSAP 20 “Foreign Currency Translation”. The focus of the study is to examine…
Abstract
Purpose
This paper aims to assess the financial performance of firms that adopted or deferred the adoption of SSAP 20 “Foreign Currency Translation”. The focus of the study is to examine the impact of certain accounting issues, such as liquidity, hedging, foreign currency loans, managerial compensation, pre‐ and post SSAP 20 treatment of translation differences, etc, on the behaviour of firms.
Design/methodology/approach
The paper follows the positive accounting theory context and utilises parametric (logistic regression) and non‐parametric (Kruskal–Wallis test) tests to form and test theoretical hypotheses and relations between groups of firms with different financial characteristics.
Findings
The study provides evidence that the implementation of SSAP 20 has overall strengthened the financial position of adopters. Adopters that used different translation methods prior to adoption tend to exhibit different financial characteristics (e.g. higher leverage) in the pre‐actual adoption period. In contrast, they present no substantial differences in the actual adoption period. The findings show that adopters give priority to their stock market picture and tend to distribute higher dividend to their shareholders even if this leads to lower management payout.
Research limitations/implications
Firstly, for the period under investigation, the availability of accounting and financial data and the disclosure of accounting information in the financial statements were to some extent limited. Secondly, it is difficult to see through managers’ inner intentions, and as a result managers’ behaviour and motives may not always be clear and conceivable to outsiders.
Originality/value
This study has significant implications for accounting standard setting bodies and investors. It provides insight about firms’ objectives and potential attitude and reaction to the issue of accounting regulation. This study also formulates the basis for studying firms’ behaviour and reaction with regard to other accounting standards and financial issues.
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As is true for all areas of financial management, working capital management is more complex for the multinational corporation (MNC) than for firms engaged in only domestic…
Abstract
As is true for all areas of financial management, working capital management is more complex for the multinational corporation (MNC) than for firms engaged in only domestic operations. Such incremental complexity is due to a number of reasons related to the effects of operating in diverse economic and political climates and tax jurisdictions. This article is concerned with selected aspects of how foreign exchange risk—the potential impact on a MNC's profitability, net cash flows, and market value of a change in exchange rates—may affect working capital management.
George Iatridis and Nathan Lael Joseph
To provide a framework of accounting policy choice associated with the timing of adoption of the UK Statement of Standard Accounting Practice (SSAP) No. 20, “Foreign Currency…
Abstract
Purpose
To provide a framework of accounting policy choice associated with the timing of adoption of the UK Statement of Standard Accounting Practice (SSAP) No. 20, “Foreign Currency Translation”. The conceptual framework describes the accounting policy choices that firms face in a setting that is influenced by: their financial characteristics; the flexible foreign exchange rates; and the stock market response to accounting decisions.
Design/methodology/approach
Following the positive accounting theory context, this paper puts into a framework the motives and choices of UK firms with regard to the adoption or deferment of the adoption of SSAP 20. The paper utilises the theoretical and empirical findings of previous studies to form and substantiate the conceptual framework. Given the UK foreign exchange setting, the framework identifies the initial stage: lack of regulation and flexibility in financial reporting; the intermediate stage: accounting policy choice; and the final stage: accounting choice and policy review.
Findings
There are situations where accounting regulation contrasts with the needs and business objectives of firms and vice‐versa. Thus, firms may delay the adoption up to the point where the increase in political costs can just be tolerated. Overall, the study infers that firms might have chosen to defer the adoption of SSAP 20 until they reach a certain corporate goal, or the adverse impact (if any) of the accounting change on firms' financial numbers is minimal. Thus, the determination of the timing of the adoption is a matter which is subject to the objectives of the managers in association with the market and economic conditions. The paper suggests that the flexibility in financial reporting, which may enhance the scope for income‐smoothing, can be mitigated by the appropriate standardisation of accounting practice.
Research limitations/implications
First, the study encompassed a period when firms and investors were less sophisticated users of financial information. Second, it is difficult to ascertain the decisions that firms would have taken, had the pound appreciated over the period of adoption and had the firms incurred translation losses rather than translation gains.
Originality/value
This paper is useful to accounting standards setters, professional accountants, academics and investors. The study can give the accounting standard‐setting bodies useful information when they prepare a change in the accounting regulation or set an appropriate date for the implementation of an accounting standard. The paper provides significant insight about the behaviour of firms and the associated impacts of financial markets and regulation on the decision‐making process of firms. The framework aims to assist the market and other authorities to reduce information asymmetry and to reinforce the efficiency of the market.
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