 |
|
Forex Market and Dollar Market
Forex Money Accounting Exposure
When a company invoices or purchases in forex trade of foreign currency, it takes on a different set of problems. It confronts an accounting exposure. This is the risk of foreign currency change as it relates to the financial statements. Several other terms are sometimes used to define this type of risk. For example, we often hear of balance sheet exposure, transactional exposure, translation exposure, consolidated exposure, etc.
Because it shows up on the financial statements, accounting exposure is quite visible. This visibility makes it the most troublesome form of risk for many financial officers in forex field. Therefore, most of your consulting efforts will be directed toward managing these accounting exposures. After all, stockholders and creditors scrutinize the company's financial statements more rigorously than they do its distributors' and competitors'!
The balance sheet is often produced just four times each year, and the values reported are those that exist on each of those four particular days. They may be quite different from the values the day before or the day after the reporting date. The exposed currency position, then, is simply a snapshot. It is a static view, and not very useful in projecting the future impact the exposure will have on the company. For this reason, exposure management that concentrates solely on the balance sheet may bring about more pervasive foreign exchange risk. The Canadian dollar exposure tells us something about the nature of the operation.
|
|
|
 |
|
|
Convertible Currency
Currency which can be freely exchanged for other currencies or gold without special authorizations from the appropriate central bank.
|
|
Fundamental Analysis
 Thorough analysis of economic and political data with the goal of determining future movements in a financial market. |
|
|
 |
|
It's normally condensed as the dollar sign, $. The U.S. dollar is divided into 100 cents.
The euro is the currency of 13 European Union countries.
|
|
|
|
The company pays the Canadian mill in the mill's local currency, thereby incurring Canadian dollar payables. Some lumber is inventoried at the mill or in box cars on a siding, which shows up in the inventory values. The company also sells the finished partitions in Canada through distributors, and has outstanding receivables from these sales. Apparently, the company is in the process of building a mill in Canada to supply the Canadian market better, which accounts for the property under construction and the notes payable to a Canadian bank to help finance it.
The "bottom line" exposure is the sum of the U.S. dollar value of foreign currency-denominated assets less the U.S. dollar value of foreign currency-denominated liabilities. Notice that the company has a net short-term Canadian dollar asset exposure worth US$30 million ($109 million - $79 million). It has an additional long-term asset exposure worth US$12 million.
It is important to recognize that each of these book entries comprises a foreign currency transaction. In other words, the company is transacting-thereby acquiring assets and incurring liabilities-in a currency other than its home currency. The currency used in the normal course of business and the one in which it denominates its financial reports is, of course, the U.S. dollar, which is referred to as the functional currency of the company. Any currency other than the functional currency is called a nonfunctional currency.
Transactional Exposure
Accounting exposure resulting from nonfunctional currency transactions of a parent company is called transactional exposure. In small- to mediums-sized companies, (particularly those relatively new to exporting or importing), that have no foreign subsidiaries and centralize all financial transactions in one department; transactional exposure is the only form of accounting exposure incurred.
Different types of transactional exposure are treated in different ways for accounting and tax purposes. Accepted practices are those put forth in statements issued by the Financial Accounting Standards Board, or FASB. The FASB Statement 52 deals specifically with foreign currency exposure. According to FASB 52, the cash flow value of the foreign currency must be used to prepare financial reports. Assets and liabilities must be "marked to the market." Any gains or losses incurred from changes in exchange rates between the time the transaction occurred and the time the balance sheet is prepared must be reported as a separate line item on the income statement. This item is designated "Gain Loss on Currency Translation" in the income statement above.
This procedure is troublesome to financial managers because the foreign exchange gain or loss must be included in the income statement; therefore, it directly affects earnings and profitability, with consequent tax implications. Such high visibility accounts for the sometimes Herculean efforts that some companies make to hedge or reduce transactional exposure. Rocker Ink’s income statement shows a foreign currency loss of $232 million dollars, a loss which reflects depreciating-currency assets, appreciating-currency liabilities, or both. Such loss can certainly have a major impact on profitability for a multinational with a large percentage of its business in nonfunctional currencies. |
|
 |
|
