It’s mission-critical for companies to protect their margins, revenues, and expenses from unnecessary volatility. A lot of the time, volatility comes from currency changes — or, foreign exchange risk.
Most treasury professionals are comfortable gathering and netting down same currency exposures that go in opposite directions.
Translation and transaction accounting are often confused for one another — but the difference between them is important. How can you tell them apart?
If your company transacts internationally, you know you need to use exchange rates to not only convert foreign currency transactions from the local currency into USD but also to translate foreign currency financial statements.
Cash flow risk is defined as the variability of functional cash flows for an anticipated transaction or on an existing asset/liability due to a particular risk (in this case, foreign currency risk).
In the late 1990s and into the early 2000s, the spreadsheet was the treasury and accounting tool of choice. Computer programs were still relatively primitive, and the smart phone had not yet arrived. Business professionals leaned heavily on spreadsheets due to their flexibility, powerful set of available formulas and relative ease of use.
ASC 830 provides guidelines on how to determine the functional currency of an entity. This is typically an election made by management based on the economic environment in which the company operates — but the process is more complex than that.
David Bowman with the Federal Reserve Board has asked the Association for Finance Professionals (AFP) to be the voice of Corporate Treasury in terms of addressing LIBOR for the Alternative Reference Rates Committee (ARRC) as part of the Coordination Subgroup.
Treasuries use cash pooling — also known as a cash sweeping system — to provide liquidity to legal entities, aggregate cash for investment or to accelerate debt repayment.
For many years, corporations had to decide if they should purchase an all-in-one or best-of-breed treasury workstation.
As you know, the LIBOR transition topic is evolving on an almost daily basis. Earlier this week, the FASB approved the finalization of guidance to assist entities with the transition away from LIBOR. The new Accounting Standards Update (ASU), which is expected to be issued in early 2020, will include optional expedients and exceptions to accounting guidance.
How and why companies hedge foreign currency risk depends on factors such as the industry, risk management acumen and management team perspective. But most public corporations do hedge their FX risk for one reason or another.
What’s the Issue? Britain is ending support of the London Interbank Offered Rate (LIBOR) on or about 2021. US regulators currently plan to replace LIBOR with the Secured Overnight Financing Rate (SOFR) curve. The pending “Illiquid LIBOR Market” and related lack of transparency will render valuations of LIBOR priced instruments troublesome.
LIBOR has been referred to as the plumbing buried in many financial contracts, and the end of LIBOR will cause a seismic shift in the financial markets.
If you use Hedge Trackers’ Outsourcing and/or Software suite (Capella) services, you might be wondering what’s going to happen when interest rate reform occurs and SOFR replaces LIBOR in early 2021.