Accounting for foreign currency is controversial in Australia and overseas. While firms have lobbied strongly with respect to the regulation of foreign currency accounting policies, the literature is inconclusive as to whether managements' reporting was dominated by incentives to transfer wealth via contractual payoffs (opportunistic) or to maximise firm value (efficient). This thesis examines Australian firms' voluntary reporting treatments of foreign currency gains and losses arising from the translation of overseas subsidiary accounts. Prior to the introduction of AAS20 - Statement of Accounting Standards - Foreign Currency Translation in 1985 most firms reported the translation gain or loss in reserves or reported earnings. Firms were almost evenly split in the reporting method they adopted (Taylor, Tress & Johnson, 1990). The thesis examines this cross-sectional diversity. The objective of the thesis is to determine whether managements' behaviour with respect to the reporting method adopted in 1984 and 1985 was predominantly motivated by incentives to transfer wealth between contractual parties or to maximise the value of the firm.
The evidence suggests that management acted opportunistically with respect to debt contracts. Both interest coverage and leverage were significant in several tests. However, the results do not all support an opportunistic motivation. Given that the assets of overseas subsidiaries are typically excluded from debt covenants (Whittred & Zimmer, 1986), significance of debt-related incentives implies that lenders use information other than debt covenants in their own assessments of the ability of firms to repay debt. Cross-sectional differences in reporting methods were unassociated with variance in earnings per share and management ownership. These results are interpreted as indicating that the performance of self-sustaining overseas subsidiaries is typically excluded from management appraisal and compensation.
The results show that little switching of reporting methods by firms occurred in 1984 and 1985. While a relationship was found to exist between whether the firm had a translation gain or loss and switching of reporting methods, the relationship was the opposite to what is expected if managers were acting opportunistically. Overall, the results provide weak evidence that firms' translation gains and losses were reported as a result of the opportunistic behaviour of managers.