Management of translational (consolidated) currency...

Managing the translation (consolidated) currency risk

Consolidated currency risk arises, for example, when balancing the financial balances of TNK subsidiaries. In carrying out international operations, TNK's subsidiaries hold assets and liabilities denominated in currencies other than the parent company's currency. At the same time, shareholders in the home country of the parent company are interested in the results of their functioning, expressed in the domestic currency, which requires the broadcasting of the respective foreign currency positions of subsidiaries in the domestic currency. This creates a currency risk, the source of which is the possibility of a discrepancy between assets and liabilities expressed in currencies of different countries.

For example, if a United States company has a subsidiary in the US, then it has assets the value of which is expressed in US dollars. If a United States company does not have sufficient liabilities in US dollars, compensating for the value of these assets, the company will be at risk. The depreciation of the US dollar against the ruble will lead to a decrease in the balance sheet value of the assets of the subsidiary, since the balance sheet of the parent company will be expressed in rubles. Similarly, a company with net liabilities in foreign currency will be exposed to translational currency risk in case of appreciation of this currency.

From what has been said above, translational risk, as the possibility of adverse impact on the financial statements of an international company of changes in foreign exchange rates, can be measured as the difference between the assets and liabilities of a company exposed to this type of risk. It is obvious that the consolidated currency position of the parent company will be largely determined by the choice of the method of consolidation, i.e. exchange rate, which will be broadcast.

There are three main ways to consolidate accounts:

1) the final course method;

2) the method of distinguishing monetary (monetary) balance items from non-monetary (non-monetary);

3) a method that takes into account the nature of the urgency of various balance items and the income account of the economic entity.

Final Course Method

In accordance with this method, all items of the balance sheet, with the exception of equity, are consolidated at the closing rate.

Example. Suppose the United States company has a subsidiary in the US, whose balance at the end of the year is presented below (Table 2.6).

Table 2.6

Balance metrics

Assets, thousands of dollars

Liabilities, thousand dollars

Non-current assets

150

Equity capital

100

Inventory

30

Short-term loan capital

70

Accounts Receivable

20

Long-term loan capital

30

Total

200

Total

200

Over the past year, the US dollar depreciated by 5%, but relative to the United States ruble: from 30.0 rubles. up to 28.5 rubles.

We calculate the difference between assets and liabilities subject to translational currency risk:

(150 thousand + 30 thousand + 20 thousand) - (70 thousand + 30 thousand) = 100 thousand dollars.

The depreciation of the US dollar against the United States ruble with consolidation gives a loss equal to

100 thousand (0.05 ∙ 30.0) = 150 thousand rubles.

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