Hedge Accounting and Beyond: Currency Volatility and Movements Aren’t Just Treasury’s Problem

It seems that commodity price escalation -- and recent retrenchment, in certain markets -- has gotten the better of the global sourcing volatility discussion of late than currency fluctuations. Yet currency volatility and price movements are again having a material factor on US/EU import/export strategies, not to mention the relative value of goods and services sourced in low cost, global markets. If we work for a large multinational company with a perfect balance of trade, production and sales in different global markets, we'd never have to worry about currency volatility -- the regular course of business would take care of it for us, creating natural hedges in our localized currency transactions. Yet we all know that in today's global procurement and supply chain marketplace, things are rarely that simple. I recently found a whitepaper that I think will prove valuable for those wanting to learn more about the nuances of hedge accounting treatment in the FOREX markets, as a way, combined with the right hedging strategy, to combat volatility.

The good news for practitioners worried about the fall (or rise) of the dollar compared with the Euro, RMB, Rupee and other world currencies is that hedge accounting treatment is often easier to qualify for than it is for commodities and transportation. How does it work? The authors of the above-linked paper simplify the concept by noting that given "typical accounting treatment, forex hedges are carried on the balance sheet at their fair market value, with any changes in the carrying value impacting the income statement in each reporting period ... Forex hedge accounting, on the other hand, overrides this method of recording the impact on earnings in the reporting period because the gain/loss of the hedged items and the gain/loss of the forex hedge are recorded in earnings at the same time. In this way, hedge accounting reduces the earnings volatility caused by changes in foreign currency rates."

Yet the rules and nuances qualifying for hedge accounting require an accountant, working closely with procurement and global trade professionals, to get to the bottom of. Still, hedge accounting treatment could very well help mitigate any form of currency movement at minimal cost and fuss. Given recent notes and warnings about currency movements and increased tension in world markets as Brazil and China continue to artificially weaken their currencies, it's time that companies with global sourcing exposure begin to understand all the tools they have at their disposal to manage currency exposure just as they would commodity volatility -- without leaving it just to treasury to worry about.

Jason Busch