This study examines how US multinational enterprises manage foreign exchange risks by exploring the concepts applied by management, the objectives followed, and how management has organised this important function of multinational financial management.Despite the change in generally accepted accounting principles from SFAS8 to SFAS52 and the fact that translation exposure is not real exposure, 19 of the 22 surveyed companies closely monitored accounting exposure and would take action under certain circumstances. Further, transaction exposure management still plays a significant role in foreign exchange risk management.Economic exposure management, which focuses on foreign exchange-induced changes in future cash flows, was also perceived as essential, although the degree of sophistication varies. The majority of the participating companies are risk averse and have centralised their foreign exchange risk management.
Auditors nowadays must be aggressive and involved in risk assessment and analysis. This paper identifies, analyzes, and recommends a solution to a current problem in accounting for foreign‐currency hedges. This is accomplished by an examination of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivatives Instruments and Hedging Activities, as issued in June 1998. Multi‐currency accounting is recommended as an alternative to functional‐currency accounting. The information generated by the multi‐currency versus the functional currency (as advocated in the SFAS 133) accounting methods for using options as hedging instruments is illustrated. Multi‐currency accounting excels in its transparency. It more clearly provides information on the respective exposure positions of the hedged items and the hedging instruments as well as the notional amounts. Auditors’ risk assessment and analysis can now be effectively performed under this system.
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