Translation Exposure,methods & techniques

2. MEANING
 “ The risk of loss that might arise due to changes in value of the stock,
revenue, assets or liabilities of a business due to foreign exchange
rate movements. “
 A business has translation exposure when some of its stock, revenue,
assets or liabilities are denominated in a foreign currency and need to
be translated back to its base currency for accounting purposes.
 All firms generally must prepare consolidated financial statements for
reporting purposes, the consolidation process for multinationals entails
translating foreign assets and liabilities or the financial statements of
foreign subsidiary, subsidiaries from foreign to domestic currency.

3. TRANSLATION METHODS
 Current/Non-current method: Under this, current
assets and liabilities are valued at current rate & non-
current assets and liabilities at historical rate.
 Monetary/Non-monetary method: Under this
method, all monetary items are valued at current rates and
non-monetary items at historical rates.
 Temporal method: Under this method the inventory and
investments are translated at current rate if they are valued
at the market price.
 Current rates: Under this method all assets, liabilities,
income & expenses are translated at current rates of
exchange.

4. MANAGING TECHNIQUES
 Balance sheet hedge
This consists of bringing about a balance between the net
exposed assets and liabilities, so that the net exposure is 0. If
exposed assets are more than exposed liabilities, the exposure
can be made zero by increasing the liability. Similarly if liabilities
are more than assets we make more purchases of assets.
 Exposure netting
An MNC may see to that the positive exposure by a negative
exposure in the same or similarly placed currencies (i.e., with
appreciating or depreciating currency) They cannot be balanced
by crossing currencies.

5. Cont…
 Leading & lagging
Assets > Liabilities Foreign currency appreciated LEAD
Assets < Liabilities Foreign currency depreciated LAG
 Forward contract
A company with a positive exposure (assets more than
liabilities) will sell forward the exposed currency to balance the
net effect on balance sheet. A company with a negative exposure
(liabilities more than assets) will purchase forward the currency
to get the same result.

6. Presented by,
Rashad A.K
Vishnu. M