Accounting Exposure Definition
Accounting Exposure is the total net of accounting statement items on which loss could occur because of changes in currency exchange rates.
Big or small the effect of accounting exposure towards the international company or Multinational Company (MNC) depends on several factors as follows:
a. The Level of the Influence of Foreign Subsidiary
In this case, the greater the role of an MNC subsidiary abroad thus the influence will be greater on the consolidated financial statements of the MNC. For example, an MNC that exports more than in its own home country, then the influence of its subsidiary abroad is relatively small, so that the consolidated financial statement is less affected by the change or the fluctuation in foreign currency exchange rate or it can be said that the accounting exposure is relatively small. However, the MNC is still able to experience the great influence of the transaction and the economic / operating exposure.
b. The Location of the Foreign Subsidiary
If the subsidiary is located in a country that the forex exchange rate is relatively stable, thus the accounting exposure will be relatively small and vice versa.
c. The Accounting Method Used
The method used to assess the assets and liabilities will determine the level of accounting exposure.
Accounting Exposure Example
The following example shows accounting exposure that was experienced by a U.S. MNC which has a subsidiary in the UK.
Translation / Accounting Exposure
| Reporting Year | Subsidiary Earning Average | Forex Translation | Earning |
| Years I |
GBP 5 M |
USD 2.40 / GBP | USD 12.0 M |
| Year II |
GBP 6 M |
USD 1.15 / GBP | USD 6.9 M |
From the above example it can be seen that although the acceptance of the subsidiary in the UK increased by 20% from GBP5 M to GBP6 M, the consolidated income statement of the USA MNC is the decreased by USD5.1 M (USD12M - USD6.9 M).
This can occur because of big depreciation of GBP relatively, which is from USD2.40/GBP becomes USD1.15/GBP and through it is not the fault or the failure of the UK subsidiary.
As a general conclusion from the description of some kinds of the exposure above, several factors determining the level of exposure can be summarized as follows:
Exposure Level Determinants
A. If the type forex exposure is transaction exposure, thus the exposure level determinants are:
• The receivable / payable value that will be received in each exchange.
• The potential level of fluctuations in each of foreign exchange value.
• The correlation of forex fluctuations concerned.
2. If the type forex exposure is economic / operating exposure, thus the exposure level determinants are:
• The three factors above
• The impact of foreign exchange fluctuations on the domestic currency cash flow.
3. If the type forex exposure is Translation / Accounting Exposure, thus the exposure level determinants are:
• The level of business of each foreign subsidiary
• The potential of the fluctuation level in foreign currency to reporting currency.
• The correlation of concerned forex fluctuations.
Bibliography
McGraw-Hill.10th Edition."International Business: The Challenge of global Competition".
Zani, D.S. 2011 "Lalu Lintas Pembayaran Internasional 10", zani-zanizone.blogspot.com/2011/01/lalu- lintas-pembayaran-internasional-10.html
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