Foreign Exchange Losses Research Articles

The Value Relevance of Accounting Information during a Financial Crisis: Thailand and the 1997 Decline in the Value of the Baht

This study addresses whether the financial turmoil surrounding the devaluation of the baht affected the value relevance of Thai accounting information. Our results suggest a decline in the value relevance of Thai book values and earnings following the devaluation. Prior to mid 1997 the Bank of Thailand pegged the value of the baht to a basket of currencies of which 80% was weighted to the US dollar. In response to pressure by currency speculators the bank abandoned its peg on July 2 1997 in favor of a managed float. The devaluation was followed by volatile exchange rates. The change in value relevance of accounting information after the devaluation may be attributable to the initial recognition of foreign exchange losses and the subsequent recognition of foreign exchange gains as exchange rates fell and then recovered.

Korean producers increase sales, but report lower profits

South Korean chemical producers recorded higher sales in 1997, but their profits were generally lower. Most firms would have reported losses if not for changes in reporting rules. One reason for the higher sales was a drop in the value of the Korean won at the end of 1997. South Korean chemical companies are mostly petrochemical producers that sell their product in U.S. dollars. A strengthening of the U.S. currency boosts sales in terms of the Korean won. Another factor that helped South Koreans was relatively strong demand from China, the main buyer of their chemical products. In terms of profitability, though, weakening prices meant that gross margins expressed in U.S. dollars were lower. Moreover, the slumping won increased repayment charges sharply for companies with foreign obligations. In fact, the foreign-exchange losses would have forced so many publicly listed companies to report net losses that the Korea Stock Exchange in late December relaxed financial reporting ...

The economic impact of a foreign debt bail‐out for private firms in Ecuador

In this article the effect of Ecuador's general foreign debt conversion programme on private firms' financial position is analysed. The programme, called the Sucretizacion, was similar to programmes implemented by many heavily indebted countries after the debt crisis began. I concentrate on the Sucretizacion's implicit transfer from the government to firms, arguing that it was large, but unnecessary. Very few firms would have gone bankrupt because of their devaluation‐induced foreign exchange losses. What is more, I find no evidence that firms receiving these transfers used them to strengthen their balance sheets.

Taxation Treatment of Foreign Currency Exchange Gains and Losses on Borrowings By Australian Resident Taxpayers

Over recent times, Australian enterprises have increasingly turned to overseas sources to finance their business operations and capital works programems. Where an overseas loan is denominated in foreign currency, the Australian enterprise will realise a foreign exchange gain or loss where the relevant foreign currency exchange rate changes during the term of the loan. This paper examines the taxation treatment of foreign currency exchange gains and lossses with special attention being paid to the income/capital dichotomy. Amendments to the Income Tax Assessment Act 1936 throughout the 1980s have seen the introduction of Division 3B and capital gains tax which have somewhat blurred, but not reduced, the significance of the dichotomuy.

General Equilibrium Analysis of Negative Value‐added

A simple two‐sector general equilibrium model is developed to show how the phenomenon of negative value‐added occurs in the protected sector, when the intermediate input is an exportable of the country. Previously, it has been shown in a partial analysis that the production loss of negative value‐added comprises two elements – the foreign exchange loss and the domestic resource loss. These losses are geo‐metrically identified in the general equilibrium model. This analysis departs from earlier ones, however, in that the intermediate input is treated as an exportable good rather than an importable one.

Covered interest arbitrage opportunities in the South African foreign exchange market

The Interest Parity Theory states that in an efficient market, any interest differential between local and foreign sources of finance will be offset by the forward premium/discount. Therefore, opportunities to engage in profitable Covered Interest Arbitrage transactions will be eliminated quickly. The fall in the Rand/Dollar exchange rate resulted in many South African companies reporting substantial foreign exchange losses on offshore loans. Companies were attracted to foreign sources of finance because of lower foreign interest rates. The authors conclude, on the basis of empirical tests, that the forward Rand/Dollar exchange rate followed its interest parity value very closely over the period August 1983 - August 1985. Opportunities to engage in risk-free arbitrage activities were offset by related transaction costs. The South African foreign exchange market is efficient to the extent that risk-free profit opportunities did not exist for the period under review and therefore there was no benefit, after adjusting for risk, for South African management to borrow from offshore sources of finance.

Adjustment to a Foreign Exchange Shock: Iran, 1951–1953

Few oil-producing economies, and for that matter few primary commodity-producing countries, have experienced as abrupt and severe a loss of foreign exchange earnings as that undergone by Iran in the period 1951–1953 following the nationalization of the oil industry and the subsequent international boycott of Iranian oil. While the literature on Iran during this period is extensive, it has focused largely on the political implications of nationalization and not so much on the economy's adjustment to the loss of foreign exchange. This article argues that the Iranian experience provides an instructive case study–admittedly an extreme one—of the ability of countries exposed to external shocks to adjust to the new realities.

The international flow of third level lesser developed country students to developed countries: Determinants and implications

This study analyses the international flow of third level developing country students to advanced countries from the perspective of sending authorities in developing countries. The magnitude of this flow can hardly be overemphasized; on the basis of a conservative estimate made in the article, the annual loss of foreign exchange entailed by this flow amounted to 17 percent of the interest repayment on total external debts of the lesser developed countries (LDCs) in 1979, a sum which the developing countries themselves can hardly ignore. On an aggregate basis, our principal hypothesis is that the outflow of students is determined primarily by excess demand for third level education in developing countries. The empirical results support this hypothesis, while pointing to the importance of other factors. Excess demand for third level education in the developing countries is one of the most important determinants of the flow of developing country students to the advanced countries. On the whole, expansion of developing country tertiary education, at the national or regional levels, could effectively divert some of the flow to local institutions. Aside from this, expansion can also be argued on the basis of the high returns to third level education in developing countries compared to the returns to physical capital, as well as the considerable economies of scale associated with this level of instruction. Further, given the willingness/ability of the students to pay, as witnessed by the fact that the vast majority of developing country students finance privately their education abroad, the expansion of third level education in LDCs could be funded substantially via user charges and student loan schemes.

Foreign Exchange Gains and Losses: Impact on Reported Earnings

During the period 1974–77 firms affected by Statement 8 of the Financial Accounting Standards Board dealing with foreign currency translation responded to the FASB's invitation to comment. In this study, the reported exchange gains and losses of firms that submitted comments to the FASB and a broad sample of multi-national companies are examined. There is limited evidence that FASB respondents suffered greater swings in pretax earnings as a result of FASB than did other multinationals.

Taxation and the International Money Market Investment Decision

> The interest parity doctrine asserts that covered yields in two countries must always be nearly the same. Because it ignores tax factors, however, this assertion is incorrect. The yield on foreign instruments includes both interest component, taxable in both Canada and the U.S. at the ordinary income rate, and a foreign exchange gain or loss, which can come in the form of a hedged premium or discount if the foreign currency proceeds are sold on the forward market, or unhedged gain or loss if the proceeds are sold in the spot market. Since all capital gains in Canada and all long-term capital gains in the U.S. are subject to diminished taxes, the key question is whether exchange gains are capital gains or ordinary income. Whether investment in the foreign instrument is hedged or unhedged makes little difference to its tax treatment. What does matter is whether the investor's business and investment transactions qualify his securities for capital asset treatment. Canadian tax authorities treat the gain or loss on forward contracts as falling within the capital account, and accord foreign investments capital gains treatment unless they constitute an adventure in the nature of trade. While practice in the U.S. is less clear-cut, one court concluded that transactions involving capital assets are themselves of a capital nature, and the U.S. tax code defines investments and securities as capital assets. Because of tax factors, a U.S. investor may find a Canadian instrument more attractive, even though its pre-tax yield is below that on a comparable U.S. investment. (Of course since both U.S. and Canadian investors can write off capital losses only against capital gains, the after-tax yield on a covered transaction depends on the investor's circumstances.) As a general rule, corporations that select their money market instruments without regard to tax considerations are likely to forego substantial tax savings. >

Transport Costs on Indonesian Exports: The Foreign Exchange Loss

Transport Costs on Indonesian Exports: The Foreign Exchange Loss

The Analysis of Short-Term Cross-Border Financing Decisions

Moving needed funds into and out of subsidiaries in countries where exchange regulations and balance of payments weakness are prevalent has always been much more of an art than a science. This paper is not intended to diminish the artistic component of this critical task, which consists in locating and defining the various and sometimes devious methods of inserting and extracting the right amount at the right time. Rather, it is sought to strengthen the skill of the artiste in determining which of several possible channels for funds flow should be used. To provide a framework of practicality for the discussion to follow, suppose the corporate treasurer of XYZ Corporation needs to provide his subsidiary in the country of Parcheesi 10,000,000 Parcheesian rupees (Ru) for a one year period. The local treasurer of the Parcheesian subsidiary proposes that this be funded by a parent company loan of Ru 8,000,000 at 15% per annum and a parent guaranteed loan of $1,000,000 (Ru 1 = US $0.50) from the local branch of a U.S. bank. This funding proposal is referred to as Package 1. Upon checking with another banking connection, the treasurer finds that the possibility exists for the parent to engage in a link financing arrangement. The parent company places $5,000,000 on deposit at 4% per annum with the head office of the bank, whose branch in Parcheesi simultaneously loans the subsidiary Ru 10,000,000 at 21% per annum. This proposal is designated Package 2. All loans and deposits under both financing packages are for a one year term, with interest payable at the end of the period. Both packages result in the provision of exactly Ru 10,000,000 to the subsidiary. Package 1, however, requires that the parent itself provide only $4,000,000, in contrast to the link financing alternative, which requires $5,000,000. The parent company will find whatever funding is required in the Eurodollar market at 9% per annum. Interest income and foreign exchange gains are taxable, and interest income and foreign exchange losses are tax deductible for both the parent and the subsidiary; the marginal tax rate in the United States is assumed to be 50% and in Parcheesi, 10%. For purposes of exposition, the marginal tax rate on foreign source income to XYZ is the same as that on domestic source income, although the approach developed here is extended at a later point in the paper to handle differential tax rates. No market for the forward rupee exists, and thus neither XYZ nor its subsidiary may cover their loan positions by forward operations. The basic decision problem thus becomes the selection of one of the two competing financing alternatives, and the primary factor complicating the problem is uncertainty

Foreign Exchange Operations of U.S. Banks

In recent months the Federal Reserve Board and other bank regulatory agencies have been giving special consideration to supervisory or regulatory reforms that might be implemented to limit banks' exposure to foreign exchange losses. This paper reviews the nature of certain of the risks associated with bank's foreign exchange operaions and discusses, in general terms, some of what the Federal Reserve has learned in a recent survey of the procedures employed by the U.S. banks to monitor and limit their exposurein foreign exchange operations.

The welfare loss of negative value-added

This brief paper applies the ‘triangles’ method of measurement of the cost of protection to an industry with negative value-added in international prices. The production loss cannot be estimated in this case by the normal procedure, which utilizes the effective protective rate: the latter is negative, when defined in the conventional way, and is thus useless for the purpose on hand.The production loss is separated into two components: the negative value-added itself — the foreign-exchange loss; and payments to domestic productive factors — the domestic resource loss. Despite the fact that the effective protective rate as such does not appear in the formula for the estimation of the production loss, this loss is presented as, among other things, a rising function of the output duties and of input coefficients and as a declining function of input duties — all the ingredients which make the effective rate of protection.

Accounting Determinants of Foreign Exchange Gains and Losses

(1975). Accounting Determinants of Foreign Exchange Gains and Losses. Financial Analysts Journal: Vol. 31, No. 2, pp. 26-30.

The Time of Recognition of Foreign Exchange Gains and Losses on Revenue Account

The Time of Recognition of Foreign Exchange Gains and Losses on Revenue Account

Prospects for the Pakistan Tea Industry

Pakistan's foreign-exchange earnings from tea, which during the period 1951-53 averaged more than 40 million rupees annually, had fallen to an average of 6 million rupees annually during the period 1964-66. This decline in earnings resulted from the diversion of tea from export to domestic markets where higher prices reflected the extent to which the growth of domestic tea consumption had exceeded the growth of production. Recognising that continuation of this trend would lead to Pakistan becoming a net importer of tea with further loss of foreign exchange, the government took steps in the early sixties to en¬courage expansion of tea production as an alternative to restraining demand through rationing or eventual import controls. In this paper our primary concern is to establish, through analysis and forecast of market forces, the like¬lihood of Pakistan being able to maintain its self-sufficiency position in tea production up to 1975 without recourse to market controls, and to suggest policy measures that will help in achieving this objective in the longer term. An ancillary purpose is to recommend technical and economic changes that will improve the efficiency of tea production.

Company Taxation in Australia

N the years since World War II Australia has been faced with a chronic deficit in its balance-of-payments current account. This situation has come about as a result of Australia's dependence on wool and a few other exports as a source of overseas earnings coupled with substantial unsatisfied demand on the part of her people for goods produced overseas.' Downward fluctuations in wool prices have usually caused a loss of foreign exchange with a consequent decrease in national purchasing power and a contraction in the supply of money. Whenever the depletion of reserves has reached a danger point, the Commonwealth government has severely restricted imports. The restrictions are relaxed only on an improved showing in the proceeds from exports and a rise in the level of foreign exchange reserves. In recent years many leading Australian economists have become convinced that the deficit in the balance of payments on current account is a matter of indefinite duration since present prospects for substantially increasing exports are not good. Efforts being made by Commonwealth authorities to remedy the situation include the promotion of exports, endeavours to maintain currency stability, promotion of economic development, encouragement of efficient domestic production, maintenance of the climate for foreign investment, and quantitative restriction of imports as an interim measure to conserve foreign exchange for essential imports. Among officials of the Commonwealth government, the opinion is developing that it would be desirable to pursue a policy of more actively seeking prospective investors abroad and inducing them to invest in Australia. Such a policy has the following advantages: it would give much greater stability to the level of capital inflow, which is of key importance to the balance of payments; and it would enable investment to be channelled into areas where gaps in production now exist. Present economic circumstances favour such a policy but the Commonwealth government has been slow to implement it. None the less, investors from the United States and the British Commonwealth have shown ever increasing interest in Australia. Moreover, when once established in Australia overseas investors have received the enthusiastic support of both state and Commonwealth governments. Clearly, the future prospects for investment in Australia are good. Australian manufacturing enterprises enjoy the advantage of geographical proxim-