An empirical assessment of special accounting issues and financial attributes relating to the accounting treatment of translation gains and losses: the UK case

Purpose - This paper aims to assess the financial performance of firms that adopted or deferred the adoption of SSAP 20 “Foreign Currency Translation”. The focus of the study is to examine the impact of certain accounting issues, such as liquidity, hedging, foreign currency loans, managerial compensation, pre‐ and post SSAP 20 treatment of translation differences, etc, on the behaviour of firms. Design/methodology/approach - The paper follows the positive accounting theory context and utilises parametric (logistic regression) and non‐parametric (Kruskal–Wallis test) tests to form and test theoretical hypotheses and relations between groups of firms with different financial characteristics. Findings - The study provides evidence that the implementation of SSAP 20 has overall strengthened the financial position of adopters. Adopters that used different translation methods prior to adoption tend to exhibit different financial characteristics (e.g. higher leverage) in the pre‐actual adoption period. In contrast, they present no substantial differences in the actual adoption period. The findings show that adopters give priority to their stock market picture and tend to distribute higher dividend to their shareholders even if this leads to lower management payout. Research limitations/implications - Firstly, for the period under investigation, the availability of accounting and financial data and the disclosure of accounting information in the financial statements were to some extent limited. Secondly, it is difficult to see through managers’ inner intentions, and as a result managers’ behaviour and motives may not always be clear and conceivable to outsiders. Originality/value - This study has significant implications for accounting standard setting bodies and investors. It provides insight about firms’ objectives and potential attitude and reaction to the issue of accounting regulation. This study also formulates the basis for studying firms’ behaviour and reaction with regard to other accounting standards and financial issues.