Foreign Currency Forward Contracts and Cash Flow Hedging
CPA Journal, The › Vol. 82 Nbr. 3, March 2012
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Summary
The global economy and financial markets have been evolving rapidly over the past few decades, and the pressures on companies to do business internationally have risen significantly. Businesses operating internationally have experienced severe currency volatility in recent years. Current foreign exchange (FX) risk management practices, such as currency cash flow hedging using forward exchange contracts, can be helpful to international businesses. Recently proposed changes by US and international standards setters may have an impact on their use and accounting. Any international company should evaluate and analyze the benefits and pitfalls of any potential FX hedge strategy and institute a program tailored to the company's objectives and goals. In late 2010 and early 2011, the International Accounting Standards Board (IASB) and FASB narrowed their focus and concentrated their resources on completing certain high-priority convergence projects. FASB and the IASB have jointly reconsidered the accounting for all financial instruments, including hedge accounting.
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Foreign Currency Forward Contracts and Cash Flow Hedging
The global economy and financial markets have been evolving rapidly over the past few decades, and the pressures on companies to do business internationally have risen significantly. Businesses operating internationally have experienced severe currency volatility in recent years. Currency volatility not only impacts a company's financial statements; it also affects decisions on mergers and acquisitions, current and future procurement plans, investments, and divestitures. Foreign exchange (FX) fluctuations and unmanaged FX risks affect a business' s cash flows, income and loss, assets, liabilities, credit, and even market capitalization.
Current FX risk management practices, such as currency cash flow hedging using forward exchange contracts, can be helpful to international businesses. Recently proposed changes by U.S. and international standards setters may have an impact on their use and accounting.Planning for Hedge ProgramsAny international company should evaluate and analyze the benefits and pitfalls of any potential FX hedge strategy and institute a program tailored to the company' s objectives and goals. A formal hedge program requires management to identify the r...See the full content of this document
