What Is Dependent on the Capabilities of Accountant - Essay Example

RЕSЕАRСH ОF СОMРАNY АССОUNTING Prepared by Presented to Date Affiliation Introduction Hines quote describes how a person can perceive what he wants to perceive. According to him accounting is a way to predict a full picture of something and accountant is one who do this for any organization or company. Everything depends on accountant view and his subjective perception. It means, a true and fair view of something is totally depends on accountants ability to recognize the reality. If he limits his view he may ignore the important aspects of the picture but if he continues his efforts to uncover them then he can learn new perspectives. On the other hand, it is difficult for someone to present the viewed reality as whole with limited perspective and only accounting can give different ways and techniques to accountant to perceive a cleared and full picture of anything. I do agree with Hines view and for proving my argument I have chosen the topic of foreign currency transaction. This essay will provide the clear understanding on how accounting of foreign currency transaction and its operations are helpful for accountants in discovering various realities of risk in global economy in the light of international Australian accounting standards. Furthermore, it also explains how accountants develop conceptual reality of foreign currency transaction. In addition this essay will also highlight the unique accounting issues and challenges related to foreign currency in global business. Global economy has changed business practices. Now companies can sell and buy goods or products from other country as well. For this purpose accounting of foreign currency transactions have been introduced. International accounting standards IAS 21 describes how to set out foreign accounts and how to record foreign transactions if it fluctuates and IAS 39 gives hedging strategies to cover the risk that arising from fluctuation of exchange rate (Epstein & Jermakowicz, 2015). When a company operates in international market with foreign currency transaction then it has to face the risk of fluctuating exchange rate. In Australia, the Australian Accounting Standard Board made Accounting Standard AASB 121 “The Effect of Changes in Foreign Rate” under section 334 of the Corporation Act on 15 July 2004 and it amended and complied version introduced in 2007.The Australian standards 121 shows the effect of fluctuation of currency and its positive or negative impacts on Multinational firm. According to AASB 121, currency is not a risk but its appreciation and devaluation is a risk, if fluctuation is certain then there would be no risk in foreign transactions (Adler, 1984).For instance, a company sell a product to a customer who is present in another country or company wants a loan but his lender present in another country in these cases foreign currency transaction takes place. In this way foreign currency risk affects the company’s activities and its financial statement but this risk will vary company to company and activity to activity. Items that are affected by currency fluctuation risk called as exposure. These exposure are sort of instrument for accountants to draw a reality of risk in foreign currency transactions i.e. translation exposure, the transaction exposure and the economic exposure (Franke, 1991). An accountant can perceive different perspectives of risk associated to foreign currency transaction with the help of these exposures. Likewise, foreign currency transaction and its accounting estimate different exposures or risks that can directly affect the company’s financial position. In this regard Translation exposure or risk that arises from the fluctuation of foreign currency rate is very important. Australian Accounting standard 1012 which was introduced by Australian Board in 2006 that gives foreign currency translation, associated risks and its related accounting. Translation of foreign currency helps in understanding the condition and real value of assets and liabilities. Every multinational company has to face translation exposure when it invests abroad in subsidiaries or branches (Bradstreet, 2007) and accountants not only estimate this risk and make consolidated reports but also suggest hedging techniques to face translation risk. Accountants can estimate unrealized profit and loss by translating the current foreign currency rate but this translated exposure or risk has no influence to cash flow with the help of 1012 Australian accounting standards. So accountant can ignored translation exposure for practical purpose (Buckley, 2003). Hence, we can say that foreign exchange rate fluctuation adversely affect the translation of the foreign operated company’s assets and liabilities when it is denominated in foreign currency into home currency. Translation exposure is also called as accounting exposure. For instance if a company has incur the loss of $5000 and at the same time price of dollar has depreciated and from the depreciation of value it has incur $3000 then in the consolidated financial statement at year end an accountant can adjust the profit and loss ratio that has direct effect on equity and debt ratio but if the dollar price would be appreciated then the liability and loss for the company also be incurred. But this volatility can be reduced by using different techniques and operations like can purchase currency swap by making future contracts (Taylor, 2011). For instance sales of a furniture store has increased by 8% but when a company translated it into home currency it has reduced and left 4% because of home currency depreciation so to overcome this risk the accountant could use a currency swap. Moreover the other technique that can also be used by accountant by using AASB 39 accounting standard of Australian accounting to minimize translation risks like delay the amount of of account payable, convert foreign currency into local currency cash ,change local currency borrowing to local currency etc. But for this the anticipation capability of accountant must be very good (Giddy & Dufey, 2014). Furthermore, transaction exposure or risk is also helpful in clearer the reality of risk and drawing the full picture of risks impact in foreign currency transaction. Australian Accounting Standard AASB 139 also describes the accounting of foreign currency transaction and its associated risk. Transaction is mostly faced by the multinationals because they deal mostly in foreign currency. It can be defined as a risk that is faced by multinational firms when currency fluctuates and effect the value of a contact before it gets settled. Many developing and non-developing nation are facing this transaction exposure. When currency fluctuates it adversely affects the cross currency transaction and if currency fluctuates before contract get settled such a risk is called as transaction exposure (Epstein & Jermakowicz, 2015). In addition, Transaction exposure is not only associated with buying and selling of product and goods but also when future cash flows appear in a foreign currency (Dufey & Hommel, 1996; Giddy & Dufey, 2014).Likewise loans and other receivables denominated in a foreign currency also face transaction risk. Furthermore, whenever there is a difference payment date and contract date then transaction exposure is also appeared. Unlike translation exposure, the profits and losses are directly affected in transaction exposure. That is the reason transaction risk is also called as cash flow exposure because cash flows are directly affected in transaction exposure (Shapiro & Glicksman, 2002). Transactional risk is directly proportional with the time delay between making contract and settling it. The greater the time a company take to settle the contract, greater the transactional risk would be because exchange rate fluctuate day by day and time by time. For instance, an Australian company wants to calculate the overall price of a power plant, which will be built in the United States. The estimation will be based on the current price of US dollar but no one can predict the exact future price of US dollar and exchange rate of that time because it changes on daily basis. So, the arising exposure is known as contingent transactional exposure. Furthermore, an accountant can easily analyze transactional exposure in foreign currency transaction and he can also tackle it by using different kind of techniques. The most important technique of overcome the transactional risk is hedging. The company can easily protect itself by purchasing foreign currency, by using swamps, using currency futures or combination of different hedging strategies .AASB 39 Australian accounting standard helps in minimize transactional risk by giving different hedging techniques i.e.: operating activities can also be used to avoid transactional risk by fixing the value of cross currency transaction in advance. Such hedging techniques change the structure of currency movement. Operating method to cover transactional risk is useful in long-term than short-term (Ronner, 2001). Likewise According to AASB 139 standard of Australian accounting, financial instrument are also helpful in reducing risk of transactional exposure. For instance, forward contract can lock in the exchange rate that is denominated in foreign currency in this way a company can reduce the transactional exposure. Apart from forward contract the transactional risk can be managed by using price adjustment clauses in selling contract, currency option, borrowing and lending in the foreign currency. Some companies shift the transactional exposure by shifting it to supplier or customer’s respectively. Such a transfer of risk is called as risk shifting. If the customer agrees to pay in the supplier’s local currency in this case customer will face the transactional exposure and for supplier it would be risk shifting because if supplier agrees to take payment in customer’s local currency then supplier would face the transactional exposure. In short transactional exposure is a concept of risk that is arising in foreign currency transaction and it only deals with foreign currency cash flow from the contracts that are already made or would be make in near future. Likewise transactional exposure also affect directly the present and future transactions but the transactional risk can be minimized by using hedging techniques or with the combination of hedging techniques (Adler, 1984). Furthermore, another important exposure related to foreign currency transaction and its accounting is economic exposure. AASB 121 also explains the risk of foreign currency from Economic exposure. Economic exposure is somehow like the transactional risk because it also affects the cash flow of the company but unlike the transactional risk, economic exposure is not influenced the future sales. Economic exposure helps the accountant in recognizing the loss that can be generated due to the economic downturn. This kind of exposure directly affects the investments of the company. For instance, a company has launched the luxury product in the time of recession, its mean a company is dealing with great economic risk. Likewise, if a company operating a subsidiary in the foreign country but that foreign country is currently facing political instability and risky security condition then its mean it is bad for the subsidiary of foreign country because it harm the big investment of the foreign country. For example, due to recession or bad political condition banks of local country increased the interest rate it will be bad for all foreign subsidiaries and foreign investors (Shapiro & Glicksman, 2002). Similarly, if even a customer of the foreign company is present in the same country the economic exposure is also present because economic stability goes side by side with exchange rate fluctuations. Economic risk is also detriment the value of the company just because of prevailing economic recession of that country. Therefore, economic conditions of the country are very important even than the quality of product because it directly harm the foreign currency transactions. So, good economic condition can eliminate the risk of economic exposure in the transaction of foreign currency. On the other hand bad economic condition can generate transactional and economic risk (Bradstreet, 2007). After reviewing the literature and researches on foreign currency transaction, it can be deduced that different associated foreign currency risks are helpful for the accountant to recognize the various perspectives of the risk .Moreover, Australian accounting standards 139 and 121 not only recognize the effects of foreign currency transaction but also help in choosing best hedging technique to minimized the risk. Likewise,these exposure of exchange rate and currency fluctuations are very useful for the company accounting because these give the clear and insight view of risk associated with fluctuation of currency rate. With the help of these exposures an accountant can make deep and clear picture of current and future risks. He can easily tackle them by using different hedging techniques or the combination of hedging tools. An accountant cans also managing the risk on each stage of transaction very carefully. As Hines statement clearly states the need of recognition of all the aspects of accounting at all level. He states that the recognition and analysis of different concepts of accounting is totally depends on the capabilities of accountant. For this purpose especially in the accounting of foreign currency transaction, an accountant can analyze the accounting of foreign currency transaction in detail with uncovering its various aspects and perspectives of foreign currency risk or exposure (Franke, 1991). Conclusion To sum up, according to Hine everything is dependent on the capabilities of accountant that how he perceive different perspectives of the accounting concept. To prove this view of Hines, foreign currency transaction topic has been chosen and concluded that different risks associated with foreign currency transaction are very useful in analyzing the whole picture of foreign currency transaction.it also gives different techniques to tackle that risks. And these risks also give insight view of foreign currency accounting. Therefore, these risks make accountant view broader and clearer view perspective. It also enhances the skills of accountant of dealing different risk in different situations. Hence, it is important for accountant to take clear view of foreign transaction exposures, which is useful for the accountant to analyze different perspective of foreign currency accounting. References Adler, M. a. B., 1984. Exposure to Currency risk:Defination and measurement. Financial Management, Issue Summer, pp. 41-50. Bradstreet, D. &., 2007. Financial Risk Management. s.l.:Tata McGraw-Hill Publisher company. Buckley, A., 2003. Multinational Finance. 5th ed. New York: Financal Times Management. Dufey, G. & Hommel, U., 1996. Currency Exposure Management in Multinational Companies. s.l.:s.n. Epstein, B. J. & Jermakowicz, E. K., 2015. Interpretation and application of International Financial Reporting Standards. 12 ed. New Jersey: Willey and sons inc. Franke, G., 1991. Exchange rate colatility and international trading strategy. Journal of international money and finance, 10(2), pp. 292-307. Giddy, I. H. & Dufey, G., 2014. The Management of Foreign Exchange Risk. [Online] Available at: http://people.stern.nyu.edu/igiddy/fxrisk.htm [Accessed 03 May 2015]. Ronner, B., 2001. Hedging Foreign Currency Exposure: Consequences of FAS 133. Journal of Applied Finance, 11(1), pp. 23-34. Shapiro, S. A. & Glicksman, R. L., 2002. Risk Regulation at Risk: Restoring a Pragmatic Approach. 1st ed. s.l.:Stanford University Press. Taylor, F., 2011. Mastering Derivatives Markets: A Step-by-Step Guide to the Products, Applications and Risks. 4th ed. London: FT Prentice Hall. Read More