Managing Corporate Currency Risk: The Accountants’ View

As with the other roles examined in this series, the integrity of multi-currency accounting is being tested by globalization and economic instability. This installment in our blog series examines the challenges of determining functional currency rates and how corporate accountants can focus on centralization and clarity to strengthen their efforts.

For corporate accountants, various rules like the Generally Accepted Accounting Principles (GAAP) have made the act of determining appropriate FX rates for international transactions fairly straightforward. Yet, the tumultuous business and economic landscape is putting this process to the test.

As corporations have expanded into new countries, accounting teams have found themselves with more local entities and currencies to handle. Above the added workloads, accountants are also dealing with wider FX rate spreads in markets with nascent financial infrastructures, making accuracy a challenge.

Destabilized currency markets also create grey areas for accountants. While the FASB provides some guidance, high inflation (such as Venezuela’s estimated 2017 inflation rate of 1,640%) and the presence of exchange controls (such as those in Azerbaijan or Nigeria) can make it difficult to land on a stable FX rate. In these cases, regulators allow accountants to step outside of these recommendations – but the reasoning behind the bespoke rates has to be justified, creating even more work.

These developments not only increase the risk of multi-currency accounting errors, but they can create a source of tension between finance departments and foreign entities. We know of one company where a discrepancy in rates led to a disagreement as to whether the foreign entity made its quarterly sales targets.

These demands on multi-currency accounting practices present a critical moment for accountants, CFOs and the corporate treasury teams that support them to revisit – and reinforce – the structure behind FX rate sourcing. Here, consolidation and clarity can provide the greatest impact:

1)    Have a clear set of FX rate guidelines, covering foreign entities and the home office: While GAAP, IFRS and other accounting standards offer guidance on the prevailing FX rates for financial statements and transactions, there is room for more specific guidance within corporations on where/when/how rates can be sourced. For example, one foreign entity may rely on a local bank for rates, while another entity may gather the rate from a series of brokers. Accounting teams can reduce discrepancies by establishing consistent rules across the local level. In cases where inflation or controls complicate matters, a pre-established set of processes for raising FX rate issues can help avoid confusion.

2)    Where possible, centralize the sourcing of FX rates: Automated FX rate feeds cover the vast majority of global currencies. Establishing a central location where FX rates can be fed into the organization (not just for accounting operations, but for corporate treasury teams that utilize FX rates) – then accessed virtually by local entities – can help ensure that everyone is working from the same set of figures. This reduces the dependence on local rates and disparate sourcing processes.      

3)    Have a detailed historical record on-hand: Where extenuating circumstances call for the sourcing of historical FX rates outside of recommended protocols, regulators, accounting heads and the CFO will want to know the reasoning behind the moves. A detailed record of FX markets in and around the time period that a rate was extracted and how these factored into the decision-making process go a long way in allaying concerns. 

It goes without saying that the health of corporate accounting relies on the details. In a period where the dynamic nature of international business shakes up the way corporations handle foreign transactions, the details around where and how the FX rates are sourced come into greater focus. Using this period to reinforce and reinvigorate such practices will ensure that accounting teams maintain the integrity of their practice.