| Users of financial statements may be perplexed by differences in net income and comprehensive income. The proponents of comprehensive income maintain that comprehensive income is a better summary statistic of a firm's performance because it identifies all the sources of value added. However, the economics of the foreign translation adjustment suggests otherwise. When the foreign currency depreciates, U.S. producers benefit because it becomes cheaper to produce in the host country due to the increase in the purchasing power of the U.S. dollar. However, under the current rate method, the depreciation of the local currency translates not into an adjustment gain but into a loss because net assets are translated at a lower rate.;Consistent with the economic rationale, I find that the foreign translation adjustment is negatively associated with firm value. This implies that the translation adjustment is value relevant, but not in the direction indicated by the adjustment. I also find evidence suggesting that the dirty surplus items in general and the translation adjustment in particular negatively affects the value relevance of the income number. |
