Foreign currency risk: Back to the basics

There’s a lot of uncertainty these days that can cause volatility in foreign exchange rates. In this episode, PwC managing director John Horan joins host Heather Horn to take a look at how to manage foreign currency risk and how to apply the basics of foreign currency hedge accounting. Topics include:0:50 - What’s going on with currencies? We begin by talking about what’s behind the current currency volatility, and the importance of  having a comprehensive plan for currency risk management. 6:58 - The types of currency exposure. There are a variety of ways foreign currency volatility may impact the financial statements. Here we discuss the types of currency exposures that companies are concerned with.8:58 - Transaction exposures. A company has transaction exposure when monetary assets or liabilities are recorded in currencies other than their functional currency. Although many companies hedge these risks, most do not apply hedge accounting. 17:49 - Economic exposures. An economic exposure occurs when a company expects to purchase goods or sell products in a currency other than its functional currency. The company is economically exposed to changes in exchange rates, even though the future purchases or sales are not yet recognized in its financial statements.  28:39 - FASB FAQ. The FASB released guidance related to cash flow hedging and the pandemic. John provides an overview.31:51 - Translation exposures. Although most companies do not try to hedge this exposure, it is a concern. This exposure manifests itself through changes in reported earnings, as the US Dollar strengthens or weakens versus other currencies around the world.John Horan is a managing director in PwC’s National office where he assists clients with complex accounting issues in the areas of foreign currency, liabilities and equity, earnings per share, and derivatives and hedging. John specializes in large capital transactions and initial public offerings.Heather Horn is PwC’s National office thought leader, responsible for developing our communications strategy and conveying firm positions on accounting and financial reporting matters. She is the engaging host of PwC’s accounting and reporting weekly podcast and quarterly webcast series, as well as periodic webcasts for the power and utilities industry. With over 25 years of experience, Heather’s accounting and auditing expertise includes financial instruments and rate-regulated accounting.Transcripts available upon request for individuals who may need a disability-related accommodation. Please send requests to [email protected].