Foreign Currency Exposure of Multinational Firms: Accounting Measures and Market Valuation *

Foreign Currency Exposure of Multinational Firms: Accounting Measures and Market Valuation * Abstract. The accounting method in Statement of Financial Accounting Standards (SFAS) No. 8 for restatement of a foreign operation's financial statements denominated in a foreign currency into the parent's currency equivalents for inclusion in the parent company's financial statements was severely criticized by market participants and managers. Its replacement, SFAS No. 52, represented an attempt to improve on the methods of SFAS No. 8. This study examines two questions: did SFAS No. 8 produce relevant information for valuing US multinational firms, and are the results reported under SFAS No. 52 more valuation relevant than those reported under SFAS No. 8? Valuation relevance is studied because the Financial Accounting Standards Board (FASB) has stated that relevance is an important criterion for choosing among alternative accounting methods. Considered collectively, the results suggest that the rules in SFAS No. 8 produced a poor accounting measure for valuing US multinational firms, and that the introduction of SFAS No. 52 has resulted in a significant improvement in the valuation relevance of the accounting numbers associated with the restatement of a foreign operation's financial statements. However, this improvement applies only to the subset of firms that designated a foreign currency as their functional currency (i.e., switched to the current‐rate method) and not to firms that designated the dollar as their functional currency (i.e., as if they still reported under SFAS No. 8). http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

Foreign Currency Exposure of Multinational Firms: Accounting Measures and Market Valuation *

Contemporary Accounting Research, Volume 14 (4) – Dec 1, 1997

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Publisher
Wiley
Copyright
1997 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
DOI
10.1111/j.1911-3846.1997.tb00544.x
Publisher site
See Article on Publisher Site

Abstract

Abstract. The accounting method in Statement of Financial Accounting Standards (SFAS) No. 8 for restatement of a foreign operation's financial statements denominated in a foreign currency into the parent's currency equivalents for inclusion in the parent company's financial statements was severely criticized by market participants and managers. Its replacement, SFAS No. 52, represented an attempt to improve on the methods of SFAS No. 8. This study examines two questions: did SFAS No. 8 produce relevant information for valuing US multinational firms, and are the results reported under SFAS No. 52 more valuation relevant than those reported under SFAS No. 8? Valuation relevance is studied because the Financial Accounting Standards Board (FASB) has stated that relevance is an important criterion for choosing among alternative accounting methods. Considered collectively, the results suggest that the rules in SFAS No. 8 produced a poor accounting measure for valuing US multinational firms, and that the introduction of SFAS No. 52 has resulted in a significant improvement in the valuation relevance of the accounting numbers associated with the restatement of a foreign operation's financial statements. However, this improvement applies only to the subset of firms that designated a foreign currency as their functional currency (i.e., switched to the current‐rate method) and not to firms that designated the dollar as their functional currency (i.e., as if they still reported under SFAS No. 8).

Journal

Contemporary Accounting ResearchWiley

Published: Dec 1, 1997

References

  • Some time series properties of accounting income
    Ball, Ball; Watts, Watts
  • Firm valuation, earnings expectations and the exchange‐rate exposure effect
    Bartov, Bartov; Bodnar, Bodnar
  • Noisy accounting earnings signals and earnings response coefficients: The case of foreign currency accounting
    Collins, Collins; Salatka, Salatka
  • Foreign currency translation under two cases integrated and isolated economies
    Goldberg, Goldberg; Godwin, Godwin

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