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Classification of Foreign Operations For Financial Reporting

Classification of Foreign Operations For Financial Reporting Financial reporting standards on foreign currency translation in many countries such as New Zealand, US, Australia, and Canada and the international standard issued by the International Accounting Standards Committee require the classification of foreign operations for translation purposes into two mutually exclusive types integrated or independent. This classification determines the translation method. In judging whether a foreign operation is either integrated or independent, the accounting standard requires the evaluation of five qualitative factors. The standard neither describes the judgement process nor identifies the relative importance of the determining factors. It has been asserted that this lack of clarity may yield dissimilar results for firms whose circumstances are similar and consequently may reduce the comparability of financial statements across firms. Using a repeated measures design, this paper examines the judgement of preparers of financial statements financial controllers in determining the designation of foreign operations for translation purposes. The results indicate that the relative importance of the determining factors is about equal. No support is found for the assertion that the use of qualitative factors in accounting standards results in dissimilar judgements lack of consensus across respondents. Further, the results show that the subjects demonstrated consistency and selfinsight in their judgements. The results also indicate that the judgements of respondents are not biased toward either classification of foreign operation. This suggests that the observed bias may be motivated by economic factors rather than the outcome of using the qualitative cues in the accounting standard. When the respondents were debriefed, several of them identified managerial independence as another determining factor that has not been included in the standard. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

Classification of Foreign Operations For Financial Reporting

Pacific Accounting Review , Volume 12 (1): 23 – Jan 1, 2000

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0114-0582
DOI
10.1108/eb037950
Publisher site
See Article on Publisher Site

Abstract

Financial reporting standards on foreign currency translation in many countries such as New Zealand, US, Australia, and Canada and the international standard issued by the International Accounting Standards Committee require the classification of foreign operations for translation purposes into two mutually exclusive types integrated or independent. This classification determines the translation method. In judging whether a foreign operation is either integrated or independent, the accounting standard requires the evaluation of five qualitative factors. The standard neither describes the judgement process nor identifies the relative importance of the determining factors. It has been asserted that this lack of clarity may yield dissimilar results for firms whose circumstances are similar and consequently may reduce the comparability of financial statements across firms. Using a repeated measures design, this paper examines the judgement of preparers of financial statements financial controllers in determining the designation of foreign operations for translation purposes. The results indicate that the relative importance of the determining factors is about equal. No support is found for the assertion that the use of qualitative factors in accounting standards results in dissimilar judgements lack of consensus across respondents. Further, the results show that the subjects demonstrated consistency and selfinsight in their judgements. The results also indicate that the judgements of respondents are not biased toward either classification of foreign operation. This suggests that the observed bias may be motivated by economic factors rather than the outcome of using the qualitative cues in the accounting standard. When the respondents were debriefed, several of them identified managerial independence as another determining factor that has not been included in the standard.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Jan 1, 2000

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