The Effect of Changes in the Presentation Position of Foreign Exchange Gains and Losses in the Income Statement on Nonprofessional Investors’ Judgments*

In September 2020, the Korea Accounting Standards Board submitted to the IASB a domestic opinion on the IASB’s Exposure Draft ‘General Presentation and Disclosures’, including a review opinion on the classification of foreign exchange gains and losses related to the presentation of financial statements. Finalization of the standards would significantly change the way operating income is presented. This study analyzed the effect of the proposed changes on the judgment of nonprofessional investors based on an experiment in which the position of foreign exchange gains and losses on the income statement was varied. In addition, the impact of the type of foreign exchange gains and losses on nonprofessional investors’ judgments was examined from the perspective of prospect theory. Analysis of the data showed that predictions of future profitability were significantly more negative when foreign exchange gains and losses were classified into operating categories for display on the income statement than when they were classified into non-operating categories. However, no effect on investment decision-making was observed. This paper makes a significant contribution by analyzing the impact of the proposed changes on nonprofessional investors of this information in advance of their adoption. The potential impact of new accounting standards on information users need be fully considered in advance. In order to secure usefulness as accounting standards, to enhance comparability of operating income between countries or companies, and to ensure fairness in the application of regulations, preparing of systematic supplementary measures remains an important task for academia, standards setters, corporations, and regulators.