Assignment 2: Foreign Currency Risk
Albert, CEO of XYZ, Inc., desires to expand the company's sales through exports to three (3) foreign subsidiaries. Albert knows that the target subsidiaries are located in countries that require transactions to be denominated in the local currencies. Albert has researched foreign currency risk and knows that there is accounting exposure in accounting statements, operating exposure in future cash flows, and transaction exposure in outstanding obligations. Albert does not understand how these risks apply to XYZ, Inc. under his proposal or if there are any mitigating risk strategies available. Albert requests you, the head of the Risk Management division, to prepare a report that he can present to the Board of Directors on the potential foreign currency risk if XYZ, Inc. expands sales into these markets. XYZ, Inc.'s reporting currency is the U.S. dollar and the subsidiaries would purchase the merchandise as inventory items.
Note: You may create and / or make all necessary assumptions needed for the completion of this assignment.
Write a three to five (3-5) page paper in which you:
1. Specify accounting exposure, operating exposure, and transaction exposure. Determine the main financial statement effects of each type of exposure if XYZ, Inc. expands as proposed.
2. Determine two (2) types of hedges regarding foreign exchange risk, in general, and recommend the most advantageous risk mitigation strategy for XYZ, Inc. Provide support for your rationale. Note: Refer to Chapter 9 of the textbook for more information on corporate strategies regarding hedging foreign exchange risk.
3. Determine the main accounting assumptions underlying each currently used method (e.g., current rate method and temporal method). Determine the fundamental differences in balance sheet exposure from the application of each method.
4. Suggest the translation method that XYZ, Inc. should use in order to minimize balance sheet exposure. Provide support for you choice.
5. Compare the U.S. GAAP approach to the IFRS approach of translating foreign currency financial statements. Determine the main similarities and differences between the two (2) methods of translation. Assuming one (1) of the subsidiaries of XYZ, Inc. is located in a highly inflationary country, determine the appropriate translation method under FASB and provide the theoretical justification for your response.
6. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student's name, the professor's name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
• Examine and prepare the accounting entries for intra-entity asset transactions.
• Examine the impact that specific differences between IFRS and U.S. GAAP have on financial statements.
• Explain foreign currency transactions and analyze the accounting requirements for the translation of financial statements of foreign entities.
• Use technology and information resources to research issues in advanced accounting.
• Write clearly and concisely about advanced accounting using proper writing mechanics.