January 2024 Newsletter

New Year Knowledge: Read our January newsletter and discover the latest blog posts and insights from FX Initiative on currency risk management. We help finance, accounting, treasury, and sales professionals stay up to date with new training content, CPE webinars, and helpful tips & resources.

Scale the learning curve quickly and easily with our foreign exchange risk management training, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Start Training >

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Conquering Currency Risk Management

Conquering currency risk management involves identifying, analyzing, and prioritizing various foreign exchange (FX) exposures, and developing and implementing a coordinated and systematic plan that utilizes company resources efficiently and effectively to mitigate and optimize FX risk. An important part of mitigating FX risk is hedging exposures such as revenues, expenses, receivables, payables, assets, liabilities, and equity.

The degree to which companies implement adequate foreign exchange risk management practices can vary substantially, from not managing the risk at all to engaging in robust hedging activities. As a result, the FX impact on the bottom line can vary widely across organizations.

Global companies face questions including, but not limited to: How to manage currency risk? How to draft a FX risk policy? Where to look for FX risk exposures? What currency risks to hedge and how? Which strategies meet FX hedge objectives? What are the economics? How to do FX accounting? That's a lot of questions! It's time to take the FX Initiative!

FX Initiative's foreign exchange risk management training starts with watching our online video series about:

1. Foreign Exchange (FX) Market Overview
2. FX Risk Exposures
3. FX Risk Management
4. FX Spot & Derivatives
5. Hedging FX Transactions
6. Hedging Foreign Subsidiaries

Then, review and test with quizzes and CPE exams, and reinforce learning using real examples with our:

• Currency Code Locator
• FX Risk Policy Drafter
• FX Derivative Speculator
• FX Transaction Simulator
• FX Subsidiary Consolidator

FX Initiative training is available 24/7 365 to help you with FX risk policies, FX accounting, FX hedging strategies, FX risk management, and more.

Are you ready to manage FX risk? Become a FX Initiative subscriber today and access our complete suite of foreign exchange (FX) continuing professional education (CPE), examples and events at FXCPE.com. Managing FX risk has become a higher priority for many firms in 2022 and it is now easier than ever to learn the fundamentals of currency risk management. Make this the year to reduce FX risk and reap rewards abroad by taking the FX Initiative for your international business today!

Applying FX Accounting Booking Rates

Applying FX Accounting Booking Rates (Video): Recognize how businesses use specific foreign exchange (FX) rates, such as the daily FX spot rate or prior month end FX spot rate, for accounting purposes to record FX transactions on the financial statements. This video is a preview of FX Initiative’s Balance Sheet Hedging webinar as part of Learning Objective #4.

To learn more, start your FX risk management training today, which provides 24/7 365 access to our complete suite of foreign exchange (FX) continuing professional education (CPE), examples & events at FXCPE.com.

Identify the 5 Stages of the FX Trade Lifecycle

Foreign exchange trading is a critical element of currency risk management, and understanding the trade lifecycle can help organizations plan their hedging activities more efficiently and effectively. The foreign exchange trade lifecycle, as discussed in the FX Risk Management course, can be enhanced with automated resources and typically includes the following 5 stages:

1. The first stage involves identifying and evaluating exposures. To aid in the exposure identification and evaluation process, best practices relate to investment in quality automated resources such as an enterprise resource planning (ERP) system or treasury software application that can be set up to extract data across the enterprise to identify and evaluate foreign exchange exposures rather than manual analysis, which can be time consuming and limited in scope.
2. The second stage involves collecting and quantifying exposure details. These tasks can be automated through software modules such as a netting system for matching foreign currency inflows and outflows or a cash flow forecasting module for determining future exposures based on historical trends in comparison to manual collection and quantification processes through spreadsheets, which can be vulnerable to human errors and oversight.
3. The third stage involves developing and analyzing hedging strategies. This analysis process can be streamlined and structured with automated software that performs value at risk analyses and simulates hedge strategies such that scenarios can be modeled prior to trading in order to save significant time and costs down the road, whereas performing this analysis manually can limit the ability to compare economic and accounting strategies in a comparable format and in a time efficient manner.
4. The fourth stage involves the administration and execution of hedge strategies. This is increasingly facilitated through the integration of electronic trading platforms, where multi-provider execution platforms can be integrated for optimal rate bidding across numerous FX service providers in real time, coupled with automated straight though processing of trades with back office systems to handle transaction reporting, confirmation matching, and payments between counterparties rather than manually performing these critical tasks.
5. The fifth and final stage of the foreign exchange trade lifecycle is financial & managerial reporting. This communication and recordkeeping can be automated through the integration of accounting systems to enable seamless financial reporting for both internal and external audiences rather than manual reporting and compliance processes.

Overall, the 5 stages of the foreign exchange trade lifecycle include (1) identifying and evaluating exposures, (2) collecting and quantifying exposure details, (3) developing and analyzing hedging strategies, (4) administering and executing hedging strategies, and (5) financial accounting & managerial reporting. Each of these stages is essential when implementing foreign exchange trading best practices, and understanding the lifecylce can help organizations plan their hedging activities more efficiently and effectively.

To learn more about foreign exchange best practices and to observe how world class organizations such as Apple employ each stage of the FX trade lifecycle, sign up for FX Initiative’s currency risk management training. Our educational videos, interactive examples and webinar events can help you and your team better mitigate FX risk and deliver measurable results to the bottom line, so get started today by taking the FX Initiative!

Ready to start FX Risk Management Training? Click here to choose your plan.

The FX Initiative Team
support@fxinitiative.com

Discover the Details of FX Hedge Documentation

When accounting for FX derivatives, firms have a choice between the “default” and “elective” accounting treatment. Elective accounting treatment is not required and involves extra preparation and utilization of resources, but for forecasted transactions and hedges of net investments in foreign operations, the benefits can outweigh the costs particularly for publicly traded firms most concerned with mitigating periodic earnings volatility.

The “elective” accounting treatment permits special accounting for items designated as being hedged and offers 2 main financial reporting benefits; Timing & Geography: (1) timing refers to reducing periodic earnings volatility by deferring derivative mark-to-market gains and losses in equity and (2) geography refers to accounting for the derivative gain or loss in the same geographic area of the financial statements as the hedged exposure.

It is important to emphasize that elective hedge accounting never changes the economics of a hedge, only the financial reporting. The choice of whether or not to use “elective” accounting treatment will depend on the foreign exchange risk management objectives of each organization, and part of the strategic decision making process involves determining if the financial reporting benefits outweigh the administrative and compliance costs.

To satisfy the requirement for elective accounting treatment, companies must prepare formal contemporaneous hedge documentation at the inception of the hedge. The hedge documentation outlines the hedging relationship, and the entity's risk management objective and strategy for undertaking the hedge, including identification of following 5 components:

1. The hedging instrument
2. The hedged item or transaction
3. The nature of the risk being hedged
4. The method that will be used to retrospectively and prospectively assess the hedging instrument's effectiveness
5. The method that will be used to measure ineffectiveness

Effectiveness is an assessment of the degree by which the derivative offsets the hedged transactions changes in cash flows that are attributable to foreign exchange risk. While hedge documentation and effectiveness testing can range significantly in detail and complexity, two simplified examples of hedge documentation are addressed in FX Initiative’s currency risk management training.

Our Hedging FX Transactions and Hedging Foreign Subsidiaries courses walk you through real world scenarios using Apple, Inc. as an example, and show you the required documentation as well as the timing and geography benefits using our FX Transaction Simulator and Foreign Subsidiary Consolidator. Hedging documentation can be daunting, but our training makes preparation practical so you can achieve for your foreign exchange risk management goals.

Are you interested in discovering the details of FX hedge documentation? Take the FX Initiative by subscribing today!

Cheers,

The FX Initiative Team
support@fxinitiative.com

Learn Best Practice Accounting for FX Derivatives

Foreign exchange accounting is a complex area of financial reporting that many global organizations struggle with. Adding to that complexity, companies engaged in foreign exchange risk management must also learn how to account for currency derivatives. While the specific accounting rules differ between generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), the fundamental concepts are essential to understand when implementing foreign exchange risk management best practices for your international business.

Companies that hedge foreign exchange risk often have two main objectives: (1) To minimize the Income Statement impact of fluctuating foreign exchange rates, and (2) to reduce the variability in functional currency equivalent cash flows resulting from foreign currency transactions. In order to achieve the objective of minimizing the Income Statement impact of fluctuating foreign exchange rates, it is important to first consider the accounting treatment for the underlying position, and then to align the accounting treatment for the FX derivative accordingly.

At the highest level, companies can account for FX derivatives using “default” accounting treatment or “elective” accounting treatment. The “default accounting treatment requires that derivative gains and losses should be recorded in earnings on a current basis based on changes in their fair market value. The “elective” accounting treatment permits special accounting that results in changes in the fair value of the derivative to be recorded in the equity section of the balance sheet (rather than earnings) as part of other comprehensive income and then reclassified from the balance sheet to the income statement in the period or periods in which the underlying hedged item impacts consolidated earnings.

While the rules of elective accounting treatment can get quite complex, the key take away is that elective accounting treatment provides financial reporting benefits when hedging underlying exposures that do not impact the income statement on a current basis, such as forecasted transactions. Therefore, firms have a choice between the “default” and “elective” accounting treatment. FX Initiative’s currency risk management training addresses several variables to consider when choosing the most appropriate course of action for FX derivative accounting.

If you are interested in learning more about accounting for FX derivatives, FX Initiative’s currency risk management training walks you through real-world scenarios using Apple as an example. Specifically, we cover hedging forecasted revenue transactions, booked receivable transactions, and net investments in foreign subsidiaries using both elective and default accounting treatment. Learning how to account for FX derivatives is critical in order to achieve your foreign exchange risk management objectives. Start learning today by taking the FX Initiative!

Are you ready to learn best practice accounting for FX derivatives? Click here to take the FX Initiative!

Cheers,

The FX Initiative Team
support@fxinitiative.com

Check Your FX Knowledge: Take Our Pre-Test Evaluation

Are you a foreign exchange expert? Take the FX pre-test evaluation to see how you perform using our scoring brackets!

Whether you’re an experienced professional or brand new to foreign exchange, FX Initiative’s Currency Risk Management Training helps you learn currency risk management best practices using a video based on-demand format with real-world examples. Complete your FX training today in 4 simple steps:

1. Select Your FX Risk Management Training Program
2. Complete Your FX Risk Management Training Education
3. Track Your FX Risk Management Training Progress
4. Download Your Certificate of Completion

Ready to take the FX Initiative? Click here to get started!

Cheers,

The FX Initiative Team
support@fxinitiative.com