Insight to All Things Currency and Treasury Management

Data integrity problems, accounting snags and organizational issues are all factors that, often, can contribute to the very real problem of what we at FiREapps have coined as “accounting volatility.”

What exactly is accounting volatility? We define it as the following:

Systemic, recurring inaccuracies that exist in most multi-currency accounting systems, that obscure the true magnitude of a company’s foreign currency exposure in ways that make the problem difficult to detect. In many cases, accounting volatility is reflected in the data between hedging actions and actual FX gain/loss resulting from the underlying exposures.

For CFOs, Treasurers and even Controllers, the symptoms of accounting volatility can sometimes be difficult to spot. However, there are often symptoms that, if paid attention to, can act as warning signs that there may be more accounting volatility than anticipated.

We’ve put together 4 questions that can be discussed between Treasurers/CFOs and Controllers to spark discussion and help organizations to gauge what degree of accounting volatility may be present in their company:

1) How confident is your Controller that multi-currency transactions are being recorded properly, including initial entry and clearing of the transaction? 

By not recording or clearing multi-currency transactions, unexpected FX gain/loss volatility becomes a very real possibility. As an example, if a regional accounting manager records a multi-currency invoice in the local currency of the entity (vs. the transaction currency) there will be no visibility into the exposure for the Treasurer. When the payment ends up being cleared, the gain/loss on the transaction will cause a surprise impact on the income statement— something that could have been prevented.

2) When was the last time the Controller reviewed enterprise-wide revaluation to determine if the system(s) configuration and related processes produced a result that complied with FAS 52 / IAS 21?

We’ve worked with quite a few companies in our time and, in the vast majority of them, we have uncovered multiple ERP/accounting system setup/configuration and process issues that end up doing a few things. First, these issues certainly end up raising compliance concerns, but more, they also end up creating embedded FX gain/loss volatility— often very difficult to detect and as such, even more difficult to manage.

3) How confident is Accounting that intercompany transactions are being reconciled on a timely basis and are in balance?

We commonly witness intercompany transactions that demonstrate significant balance discrepancies. Intercompany issues we often encounter that can cloud foreign currency exposures include transactions that:

Have only one side recorded in the G/L
Do not have matching balances
Are not posted in the same transaction currency
Are recorded in a third currency (functional currency of entity)

4) Does the Controller perform foreign currency gain/loss analysis on a regular, monthly basis and maintain a proactive process for the resolution of exceptions? 

If the answer is yes, dig further— how often do they encounter unexpected results, and what is the process for investigation/resolution? If the answer is no, how do they verify that the gain/loss on currency exposures is as expected and within the corporate tolerance?

Combined with additional internal conversations and research, these questions will help to give you an idea of your ability to quantify and manage your foreign currency exposures, and your corporate currency program as a whole.

Want to learn more? We cover this and much more in our ebook, “The Biggest FX Problem (That No One Talks About).” There’s even a handy template that will help you form a list of goals for your currency program. Take a look today!

Click here to download the ebook for free.