TRANSLATION EXPOSURE MANAGEMENT

Translation exposure, sometimes called accounting exposure, measures the effect of an exchange rate change on published financial statements of a firm. Foreign-currency assets and liabilities that are translated at the current exchange rate are considered to be exposed. In accounting terms, the difference between exposed assets and exposed liabilities is frequently called net exposure. If exposed assets are greater than exposed liabilities, foreign-currency depreciations will result in exchange losses and foreign-currency appreciations will produce exchange gains. On the other hand, if exposed assets are smaller than exposed liabilities, foreign-currency depreciations will lead to exchange gains and foreign-currency appreciations will lead to exchange losses.This chapter has three major sections. Section 8.1 discusses four translation rules commonly used by multinational companies (MNCs) to consolidate their worldwide operations into home currency. Section 8.2 analyzes major differences between two major translation rules: FASB no. 8 and FASB no. 52. Section 8.3 considers some techniques designed to reduce translation risk.