Foreign-currency accounting methods: reporting the exchange rate risk exposure of equity

Article Abstract:

This study tests whether Australian firms' unregulated foreign-currency accounting policies indicated the extent to which equity claims against the firm were exposed to exchange rate risk. Evidence supports the hypothesis that the methods of accounting for foreign-currency gains and losses on long-term monetary-items were associated with the exposure. Methods of disposing of the gains and losses arising from translation of the accounts of overseas subsidiaries were also associated with the exposure, but not in the manner predicted. The results indicate that foreign-currency accounting policies were established in an interactive (portfolio) decision-making process, and that managers reported equity claim exposures relative to the returns to equity claims against other firms. Overall, the study provides evidence that at least some unregulated choices of foreign-currency accounting methods were made to minimise the agency costs associated with contracts between shareholders and management. (Reprinted by permission of the publisher.)

Risk assessment, Reports

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An analysis of submissions to the ASRB on Release 411 'Foreign Currency Translation - Questionnaire.' (Accounting Standards Review Board)

Article Abstract:

This study examines the accounting method preferences of the managers of firms who made submissions to the ASRB on Release 411 'Foreign Currency Translation - Questionnaire.' Content analysis of the actual submissions is used to obtain a measure of the strength of accounting method preferences indicated therein. This aspect of the study combats criticism of previous studies in relation to the oversimplification associated with the dichotomous categorization of accounting method preferences. The results of the study also provide some support for this criticism of earlier research. Overall, the study provides some evidence that accounting method preferences for foreign currency transactions are made in an attempt to maximize the value of the firm. (Reprinted by permission of the publisher.)

Analysis, Corporations, Corporations, Australian

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Accounting policies for exchange gains and losses on long-term monetary items

Article Abstract:

In Australia, management and accounting practices favor deferring and amortizing unrealized gains and losses from long-term asset and liability transactions, arising from the denomination of such transactions in a foreign currency, whereas in the U.S. and the U.K., such gains and losses are recognized immediately. The alternative method of immediate recognition of gains or losses has little chance of being approved in Australia. To find empirical support for either method, a review of Australian exchange rates is performed. The empirical data correspond to the years 1977 to 1984, with a configuration of two, three, and four year borrowings in six currencies. Results support Australia's selection of an accounting standard for foreign currency transactions.

Standards

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