Foreign Currency Exposure of a Multinational Firm: Accounting Measures and Market Valuation
Posted: 10 Jan 1999
Abstract
The accounting method in 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 several criticized by market participants and managers. Its replacements, 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 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).
JEL Classification: M41, M45
Suggested Citation: Suggested Citation