Policy and Practice for Foreign Currency Exposure Management

John;

I would suggest the following enhancements to the F/X policy. In my experience these are best practices and solid strategies to pursue.

1. All intercompany invoicing is to be completed by work day +2.
2. It is the policy of the company and a key control from this point forward that inter-company balances will be confirmed on a monthly basis by work day +3.
3. Any imbalances due to inventory in transit, disputed charges, etc will be reconciled within the current month. In the event both parties cannot agree, the receiving entity (invoicing entity) will agree to the sending entity (invoicee) in the current month to ensure inter-company balances agree and reconciled in the immediate following month.
4. If both entities cannot agree in the following month, the issue(s) will be submitted for mediation to the Director of Accounting. All accruals relating to disputed balances will remain on each legal entity’s General Ledger until mediation is concluded.
5. All inter-company balances are to be settled on a quarterly/monthly basis.

It is the policy of the company to mitigate exposure to foreign currency fluctuations by settling inter-company transactions on a monthly/quarterly basis. Although management reserves the right to engage in foreign currency hedging practices, the company does not consider these strategies as standard practice due to the complex nature and accounting for the instruments.
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I have been involved in FAS52 (currency translation) activities for the last 11 years of my career. Most of the time, the exposure a company faces relates to transactions between legal entities when funding occurs or transactions are denominated in the controlling currency (i.e., currency of the parent). Overall, anytime a transaction is initiated in a currency other than the functional currency of the legal entity (i.e., the local currency) there is a much greater risk of long term foreign currency exposure.

These risks can be mitigated by aggressively settling I/CO balances, the less that remain open the less the exposure; agressive collection efforts on any foreign denominated collection instrument, exposure to f/x changes are same as above; agressive efforts should be made to settle any foreign denominated liabilities/instruments, exposure to f/x changes are same as above.

I have worked with several clients on this issue and have seen the wrong way and the right way to pursue risk avoidance.

Let me know if there are any questions.