FOREIGN-CURRENCY ACCOUNTING METHODS: REPORTING THE EXCHANGE RATE RISK EXPOSURE OF EQUITY

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.