Managing FX risk from the bottom up.

• Author: Edens, Corey
• Position: Treasury

Recently, a treasurer for a Fortune 500 company related that protecting her company assets from foreign currency (FX) volatility felt like trying to build the Empire State Building with an erector set. That seems like an apt metaphor for lots of reasons.

While the New York skyscraper's soaring height reflects a landmark achievement, the source of its grandeur and the bulk of its mass lies beneath hidden the surface. The entire structure, in fact, weighs less than the earth that was excavated for its foundations.

When it comes to foreign currency exposure management, it's the foundation that's all too often overlooked. That foundation comes from source transaction data for foreign currency business transactions maintained by the finance organization in the enterprise resource planning (ERP)/accounting systems.

The assumption that this data is accurate and reliable is the leap of faith that treasurers must make as they build a strategy to withstand the winds of change that threaten the value of their firm. As experience has shown us time and again, treasurers need to look before they leap.

Finding the Cracks in Your FX Foundation

In the innards of most company's financial systems are cracks in the foundation. Using rigorous analytical tools and techniques, in nine cases out of 10, it is apparent that fundamental transaction data quality issues stem from two sources: underlying multicurrency accounting and system configuration issues.

Basic multicurrency accounting processes are one of the most common culprits. Improperly recorded and relieved foreign currency transactions account for the kinds of errors that often go undetected by the finance team or treasury organization, unless or until the problem has a material impact on FX gain/loss. Examples include recording business transactions denominated in a foreign currency in local currency or reconciling accounts in local currency and not transaction currency.

The other big issue stems from foreign currency-related re-measurement associated with FAS 52 (Foreign Currency Translation). Companies both large and small use a combination of manual and systematic re-measurement as part of the monthly close processes, many times in an uncoordinated fashion. Add a global multi-accounting/ERP system environment, and the issues increase geometrically.

The process is further complicated by the re-measurement functionality in accounting/ERP systems, which require continuous maintenance and administration to...