Foreign Currency Translation Method Choice: Insights From Game Theory

This paper utilizes a game-theoretical framework to analyze managerial behavior in the context of choosing foreign currency translation methods. The aforementioned problem can be constructed as a model of decision-making under uncertainty. The results of this analysis are as follows: adopt the current rate method when managerial compensation is a function of reported accounting earnings; conversely the temporal method should be employed when managerial compensation takes the form of stock options.

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How Much Will Firms Pay for Earnings That Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings

The Accounting Review ◽

10.2308/accr.2004.79.2.387 ◽

2004 ◽

Vol 79 (2) ◽

pp. 387-408 ◽

Cited By ~ 180

Author(s):

Merle Erickson ◽

Michelle Hanlon ◽

Edward L. Maydew

Keyword(s):

Stock Options ◽

Income Taxes ◽

Financial Accounting ◽

Accounting Earnings ◽

Tax Returns ◽

Tax Benefits ◽

Additional Income ◽

Tax Expense

We analyze a sample of firms accused of fraudulently overstating their earnings and examine the extent, if any, to which they paid additional income taxes on the allegedly fraudulent earnings. Based on restatements of current tax expense adjusted for the tax benefits of stock options, the evidence indicates that many firms included the overstated financial accounting income on their tax returns, thus overpaying their taxes in the process of inflating their accounting earnings. We estimate that the median firm sacrificed eight cents in additional income taxes per dollar of inflated pretax earnings. In aggregate, we estimate that the firms in our sample paid $320 million in taxes on overstated earnings of about $3.36 billion. These results indicate how far managers of firms are willing to go when allegedly inflating earnings.

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The Ethics of Managerial Compensation: The Case of Executive Stock Options

Journal of Business Ethics ◽

10.1007/s10551-006-9326-8 ◽

2007 ◽

Vol 78 (1-2) ◽

pp. 225-235 ◽

Cited By ~ 13

Author(s):

James J. Angel ◽

Douglas M. McCabe

Keyword(s):

Stock Options ◽

Managerial Compensation ◽

Executive Stock Options

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Predicting Material Weaknesses In Internal Control Systems After The Sarbanes-Oxley Act Using Multiple Criteria Linear Programming And Other Data Mining Approaches

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v25i6.999 ◽

2011 ◽

Vol 25 (6) ◽

Author(s):

Wikil Kwak ◽

Susan Eldridge ◽

Yong Shi ◽

Gang Kou

Keyword(s):

Data Mining ◽

Linear Programming ◽

Internal Control ◽

Foreign Currency ◽

Predictive Ability ◽

Cash Flows ◽

Multiple Criteria ◽

Font Size ◽

Sarbanes Oxley ◽

Material Weaknesses

<h1 style="TEXT-JUSTIFY: inter-ideograph; TEXT-ALIGN: justify; MARGIN: 0in 0.5in 0pt">Our study proposes a multiple criteria linear programming (MCLP) and other data mining methods to predict material weaknesses in a firm’s internal control system after the Sarbanes-Oxley Act (SOX) using 2003-2004 U.S. data.  The results of the MCLP and other data mining approaches in our prediction study show that the MCLP method performs better overall than the other data mining approaches using financial and other data from the Form 10-K report.  Consistent with prior research, firms that disclosed material weaknesses in their SOX Section 302 disclosures were more complex (based on the existence of foreign currency translations), more often used Big 4 auditors, and had lower operating cash flows-to-total assets ratios than the non-material weakness control firms.  Because of mixed results on several profitability measures and marginal predictive ability for the MCLP and other methods used, more research is needed to identify firm characteristics that help investors, auditors, and others predict material weaknesses.</h1>

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Accounting For Stock Based Employee Compensation: A Continuing Controversy

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v3i4.2764 ◽

2011 ◽

Vol 3 (4) ◽

Author(s):

William Wrege ◽

Mark Myring ◽

Joe Schroeder

Keyword(s):

Executive Compensation ◽

Stock Options ◽

Accounting Standards ◽

Market Value ◽

Stock Option ◽

Font Size ◽

Significant Component ◽

Employee Compensation ◽

Compensation Contracts ◽

History Of

Stock options represent an increasingly significant component of executive compensation. Theoretically, the inclusion of stock options in executive compensation contracts motivates managers to take actions that increase the market value of the firm's stock. Accounting standards regulating the treatment of stock options continue to be controversial. The focus of this paper is to examine the accounting treatment of stock options. We begin by outlining the controversial history of accounting for stock options.  Next, we examine the alternative accounting treatments for stock option.  Finally, we critique the proposed changes to the methods of accounting for stock options.

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Shareholder Composition and Managerial Compensation

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109016000636 ◽

2016 ◽

Vol 51 (5) ◽

pp. 1719-1738 ◽

Cited By ~ 7

Author(s):

Shinya Shinozaki ◽

Hiroshi Moriyasu ◽

Konari Uchida

Keyword(s):

Stock Options ◽

Good Governance ◽

Stock Option ◽

Managerial Compensation ◽

Controlling Shareholders ◽

Japanese Firms ◽

Governance Practices ◽

Governance Practice ◽

Industry Peers

Stock options are used only sparingly in Japan. Japanese firms are more likely to adopt new stock option plans when they are more (less) owned by arms-length investors (stable and controlling shareholders). Those firms have significantly more independent boards and pay higher dividends surrounding the adoption year than their industry peers. These results suggest that firms adopting stock options endeavor to meet demands for good governance practice from arms-length shareholders and to follow good governance practices in other dimensions. The coexistence of arms-length, stable, and controlling shareholders generates a situation in which stock options are not widely used in Japan.

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Noisy Accounting Earnings Signals and Earnings Response Coefficients: The Case of Foreign Currency Accounting

Contemporary Accounting Research ◽

10.1111/j.1911-3846.1993.tb00385.x ◽

1993 ◽

Vol 10 (1) ◽

pp. 119-159 ◽

Cited By ~ 65

Author(s):

DANIEL W. COLLINS ◽

WILLIAM K. SALATKA

Keyword(s):

Foreign Currency ◽

Accounting Earnings ◽

Earnings Response Coefficients ◽

Earnings Response

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Evaluating foreign affiliates: the impact of alternative foreign currency translation methods

The International Executive ◽

10.1002/tie.5060270303 ◽

1985 ◽

Vol 27 (3) ◽

pp. 8-9

Author(s):

Ahmad Hosseini ◽

Raj Aggarwal

Keyword(s):

Foreign Currency ◽

Foreign Affiliates ◽

Translation Methods ◽

The Impact

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Discussion of “Noisy Accounting Earnings Signals and Earnings Response Coefficients: The Case of Foreign Currency Accounting”

Contemporary Accounting Research ◽

10.1111/j.1911-3846.1993.tb00386.x ◽

1993 ◽

Vol 10 (1) ◽

pp. 161-166

Author(s):

JENNIFER L. KAO

Keyword(s):

Foreign Currency ◽

Accounting Earnings ◽

Earnings Response Coefficients ◽

Earnings Response

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Foreign currency translation under the temporal rate method

International Advances in Economic Research ◽

10.1007/bf02295469 ◽

1996 ◽

Vol 2 (4) ◽

pp. 444-456 ◽

Cited By ~ 2

Author(s):

Stephen D. Makar ◽

Brian B. Stanko ◽

Thomas L. Zeller

Keyword(s):

Foreign Currency ◽

Rate Method ◽

Temporal Rate

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Accounting For Stock Options: A Historical Perspective

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v1i5.3006 ◽

2011 ◽

Vol 1 (5) ◽

Author(s):

Paul J. Carruth

Keyword(s):

Executive Compensation ◽

Historical Development ◽

Stock Options ◽

Historical Perspective ◽

Effective Means ◽

Fair Value ◽

Font Size ◽

Reporting Requirements ◽

Income Statement

In recent years stock options have become one of the most dominant and controversial forms of executive compensation.  Stock options are controversial not only because of the sheer magnitude of some executive option grants, but also because of the method used to account for them.  Currently, the fair value of stock options does not have to be reported as compensation expense on the income statement.  Critics maintain this approach results in an inflated and misleading amount of reported net earnings.  This paper addresses the role of stock options as an effective means of employee compensation and traces the historical development of the accounting treatment of stock options.  In addition, the current reporting requirements for options are discussed along with recommendations for improving the manner in which stock options are accounted  for.

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