The development of international business in the last decade caused the emergence of multi-national companies around the world. This situation created the need of new accounting standards that rdlate to the consolidation of financial statements. The structure of multi-national companies, which owned many subsidiary companies, cause the need to consolidate their subsidiary\u27 financial statements into one consolidated statements. Further, because many of the subsidiaries are located in foreign countries, the consolidation proses requires considering the effects of exchange rates fluctuation. There are four different methods of translation available. The most widely used is the current rate method which translates balance sheet items using end of period exchange rate, and translates income statement items using tha average rate. The Indonesian accounting standards, which is based on the International Accounting Standards No.21, require the use of current rate method, and include translation gains or losses in the equity section of the balance sheet. One different approach that is mentioned in the Exposure Draft No.44 of the International Accounting Standards Comniittee requires that the translation gains or losses are to be included in determining net income.
This study evaluates the effect of different treatments of translation gains or losses. Data were collected from financial statements of 58 companies for the periods of 1994 and 1995. Exchange rates data were collected from the report of B ank Indonesia. Two different tests, correlation and Wilcoxon Signed Rank Test, were per formed. The results show that the amount of net income and ROI, before and after inclusion of translation gains or losses, were highly correlated. The non-parametric test shows that the two amounts are significantly different. The treatment of translation gains or losses as the element of income statement inflates the amount of both net income and ROL
Key words: financial statementsIndonesiaInternational Accounting Standards Committeerc-tum on investmentWilcoxon Signed Rank Tes
