Foreign currency matters. The effects of the ias/ifrs adoption on the italian entities' functional currency and on foreign currency translation

Abstract

This thesis investigates the effects of the International Accounting Standard 21 (IAS 21) governing the translation of foreign currency transactions and foreign currency financial statements on the financial performance of Italian companies. The main purpose of this study is to assess the impacts that the functional currency approach required by IAS 21 may have on the quality of financial reporting of Italian companies, exploring the extent to which the functional currency designation affects the choice of translation method and the recognition of exchange gains and losses in financial statements. There is a massive foreign currency translation literature, but virtually no empirical research exists that tests the impacts on financial statements of the functional currency choice under IAS 21. This work, to the best knowledge of the author, is one of the first studies and likely the first in its kind that examines the IAS/IFRS requirements on foreign currency issues and studies the extent of disclosure and compliance with IAS 21 requirements in annual reports for Italian companies. This research stems from the fact that a rigorous adherence to the functional currency criteria ruled by IAS 21 provides a different picture of companies performance if compared to those cases in which those criteria are ignored (as is the case under Italian GAAP). This study approaches the subject from a local company perspective and focuses on the Italian experience through the study of an actual case. The findings of this thesis show that there could be significant impacts in the performance earnings when the functional currency criteria are applied by Italian companies. Hence, this work supports the approach adopted by IAS/IFRS and converging with US GAAP that led to the introduction, at international level, of the functional currency concept to achieve high quality financial reporting, transparency and international comparability.