Measuring Accounting Exposure

By :
Vilgia Delarhoza
1110534016
Types of Exposure
Accounting Exposure
Transaction Exposure
Operating Exposure
Accounting Exposure

when reporting and consolidating financial
statements requires conversion from foreign
to local currency.

Transaction Exposure

occurs from changes in the value of foreign
currency contracts as a result of exchange rate
changes.

Operating Exposure

arises because exchange rate changes may
alter the value of future revenues and costs.


Economic Exposure =
Transaction + Operating Exposures


FOUR METHODS OF TRANSLATION

Current/Noncurrent Method
Monetary/Nonmonetary Method
Temporal Method
Current Rate Method
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A. Current/Noncurrent Method
1. Current accounts use current exchange rate
for conversion.
2. Income statement accounts use average
exchange rate for the period.
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B. Monetary/Nonmonetary Method
1. Monetary accounts use current rate
2. Pertains to
- cash
- accounts receivable
- accounts payable
- long term debt
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3. Nonmonetary accounts
- use historical rates
- Pertains to
inventory
fixed assets
long term investments
4. Income statement accounts
- use average exchange rate for the period.
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C. Temporal Method
1. Similar to monetary/nonmonetary
method.
2. Uses current method for inventory.


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D. Current Rate Method
all statements use current exchange rate for
conversions.
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STATEMENT OF INANCIAL ACCOUNTING
STANDARDS NO. 52
I. FASB NO. 52
A. Dissatisfaction with FASB No. 8 true
profitability often disguised by exchange
rate volatility.
B. Balance sheet translation uses current
rate method.

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C. Income statement uses

1. Weighted average rate during period or
2. The rate in effect when revenue and
expenses incurred.
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D. Translation Gains or Losses
1. Recorded in separate equity account on
balance sheet.
2. Known as cumulative translation
adjustment account.

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E. New Distinction under FASB No. 52: functional VS
reporting currency

1. Functional currency
for foreign subsidiary = the currency used in the
primary economic environment in which it
operates.
2. Reporting currency
the currency the parent firm uses to prepare its
financial statements.




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TRANSACTION EXPOSURE

WHEN DOES IT OCCUR?
A. From the time of agreement to time of payment
B. Arises from possibility of exchange rate gains
and losses from the transaction.

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MEASUREMENT

A. Currency by currency

B. Equals the difference between
1. The contractual ly-fixed invoiceamount
in a specific currency
2. The final payment amount
denominated in current exchange rate
for the specific currency.
ACCOUNTING PRACTICE AND ECONOMIC
REALITY
I. Accounting VS Economic Exposure
measurement of exchange rate risk indicates
major difference exists.

A. Accounting exposure reflects past decisions of
the firm.


B. Economic exposure
1. Focuses on future impact of
exchange rate changes.
2. Not all future cash flows appear on
the firms balance sheet.
II. Recommendations for International Business
Executives

A. There is no relationship between
1. Information from historical accounting
techniques, and
2. The firms actual operating results.
B. Chief executives should:
base management decisions on the economic
effects of exchange rate change.