bab 10

FINANCIAL RISK MANAGEMENT

Risk management is a structured approach / methodology in managing the uncertainty associated with the threat. Financial risk management focuses on risks that can be managed using financial instruments. The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities. Market participants tend not to take risks. Intermediary financial services and a market maker responds by creating a financial product that allows a trader to shift the risk of unexpected price changes to others-the other side.

COMPONENTS – KEY COMPONENTS OF FOREIGN CURRENCY RISK

To minimize exposure faced by the volatility of foreign exchange rates, commodity prices, interest rates and securities prices, the financial services industry offers a lot of financial hedging products, such as swaps, interest rate, and also an option. Most financial instruments are treated as items outside the balance sheet by a number of companies that conduct international financial reporting. As a result, the risks associated with using this instrument is often covered up, and until now the world’s accounting standard makers to be in discussions on the principles of measurement and reporting are appropriate for these financial products.

There are several key components in the foreign currency risk, namely:

• Accounting risk (the risk of accounting): The risk that the preferred accounting treatment of a transaction are not available.
• Balance sheet hedge (balance sheet hedging): Reducing foreign exchange exposure faced by differentiating the various assets and liabilities of a company abroad.
• Counterparty (the opponent): Individuals / organizations who are affected by a transaction.
• Credit risk (credit risk): The risk that the opponent had failed to pay its obligations.
• Derivatives: contractual agreements that give rise to special rights or obligations with the value derived from other financial instrument or commodity.
• Economic exposure (economic exposure): Effect of changes in foreign exchange rates against the cost and revenue in the future.
• Exposure management (exposure management): Preparation of strukturdalam companies to minimize impacts kursterhadap changes in earnings.
• Foreign currency commitment (commitment to a foreign currency): Commitment to the sale / purchase of the company denominated in foreign currencies.
• Inflation differential (difference of inflation): The difference in the rate of inflation between two countries or more.
• Liquidity risk (liquidity risk): The inability to trade a financial instrument in a timely manner.
• Market discontinuities (discontinuities market): Changes in market value suddenly and significantly.
• Market risk (market risk): risk of losses due to unexpected changes in foreign exchange rates, commodity loans, and equity.
• Net assets exposed position (potential risk of the net asset position): Excess assets position of the position of liabilities (also referred to as a positive position).
• Net exposed liability position (potential risk of the net liability position): Excess liability position to the position of the asset (also referred to as a negative position).
• Net investment (net investment): An asset or net liability position that happens to a company.
• National amount (national number): Total principal amount stated in the contract to determine the settlement.
• Operational hedge (hedging operations): Protection valutaasing risk that focuses on variables that affect a company’s expenses pendapatandan in foreign currency.
• Option (option): The right (not obligation) to buy or sell a financial contract at a specified price before or during a specific date in the future.
• Regulatory risk (regulatory risk): The risk that a law limiting the public will mean the use of a financial product.
• Risk mapping (risk mapping): Observing the temporal relationship with the market risks of financial reporting variables that affect the value of the company and analyze the possibility of occurrence.
• Structural hedges (hedge structural): Selection or relocation of operations to reduce the overall foreign exchange exposure of a company.
• Tax risk (the risk of tax): The risk that the absence of the desired tax treatment.
• Translation exposure (translation exposure): Measuring the effect in the currency of the parent company of the change in foreign exchange for the assets, liabilities, revenues, and expenses in foreign currencies.
• Transaction risk potential (potential risk of the transaction): Advantages ataukerugian foreign exchange arising from the settlement or konversitransaksi in foreign currencies.
• Value at risk (the value of the risk): Risk of loss on trading portfolio of a company which is caused by changes in market conditions.
• Value drivers (trigger value): The accounts of the balance sheet and income statement yangmempengaruhi value of the company.

MANAGING TASKS IN FOREIGN CURRENCY RISK

Risk management can enhance shareholder value by identifying, controlling / managing the financial risks faced by actively. If the value of the company to match the present value of future cash flows, active management of potential risks can be justified by the following reasons:

• Management of exposure to assist in stabilizing the company’s cash flow expectations. Flow is more stable cash flows that can minimize the earnings surprise, thereby increasing the present value of expected cash flows. Stable earnings also reduces the likelihood of default and bankruptcy risk, or risk that profits may not be able to cover contractual debt service payments.
• exposure to active management allows companies to concentrate on the major business risks. For example in a manufacturing company, he can hedge interest rate risk and currency, so it can concentrate on the production and marketing.
• The lenders, employees, and customers also benefit from exposure management. Lenders generally have a lower risk tolerance than the shareholders, thereby limiting the exposure of companies to balance the interests of shareholders and bondholders. Derivative products also allow pension funds managed by the employer obtain a higher return by giving the opportunity to invest in certain instruments without having to buy or sell the related real instrument. Due to losses caused by price and interest rate risk of certain transferred to the customer in the form of higher prices, limiting exposure management of risks faced by consumers.

DEFINITION AND COUNTING TRANSLATION RISK

Companies with significant overseas operations prepare consolidated financial statements that allow the readers of financial statements to gain a holistic understanding of the company’s operations both domestically and abroad. The financial statements of foreign subsidiaries are denominated in foreign currencies are presented again in the currency of the parent company. The process of re-presentation of financial information from one currency to another currency is called translation. Translation is not equal to the conversion. Conversion is the exchange of one currency to another currency physically. Translation is just a change of monetary units, such as only a balance sheet re-expressed in GBP are presented in U.S. dollar equivalent value. Potential risk of these measuring translational effects of changes in foreign exchange against domestic currency equivalent value of assets and liabilities denominated in foreign currency held by the company. Because the amount of foreign currency is generally translated into domestic currency equivalent value for purposes of monitoring or management of external financial reporting, translational effects that pose an immediate impact on the desired profit.

Translation risks can be calculated in 2 ways, namely:

• It is said the potential risk of exposure to positive when the asset is greater than the liabilities (ie items in foreign currencies are translated based on the exchange rate now. Devaluation of foreign currencies relative to the reporting currency (foreign currency exchange rate decreases) causing translational loss. Currency Revaluation foreign (foreign currency exchange rate increases) making a profit translation.
• Potential risk of exposure to negative when liabilities exceed assets exposed. In this case, the devaluation of foreign currency translation gains cause. Revalusi foreign currency translation losses caused. In addition to the potential risks of translational traditional accounting measurement of the potential foreign exchange risk is also centered on the potential risks of the transaction. Potential risks associated with the transaction gains and losses in foreign exchange rates arising from the settlement of transactions denominated in foreign currencies. Transaction gains and losses have a direct impact on cash flow. Potential risks of the transaction report contains items that generally do not appear in conventional financial statements, but it raises transaction gains and losses as foreign currency forward contracts, purchase commitments and future sales and long-term lease.

DEFINITION TRANSACTION RISK AND COUNTING

Companies with significant overseas operations prepare consolidated financial statements that allow the readers of financial statements to gain a holistic understanding of the company’s operations both domestically and abroad. The financial statements of foreign subsidiaries denominated in foreign currencies are restated in the currency of the parent company. The process of re-presentation of financial information from one currency to another currency is called translation. Translation is not the same as the conversion. Conversion is the exchange of one currency to another currency physically. Translation is just a change of monetary units, for example, only the balance of the re-expressed in USD expressed in U.S. dollar equivalent value.
In addition to traditional accounting measures of risk potential translational potential of foreign exchange risk is also centered on the potential risks of the transaction. Potential risks associated with gains and losses on foreign exchange transactions arising from the settlement of transactions in foreign currencies. Transaction gains and losses have a direct impact on cash flow. Potential risks of the transaction report contains items that generally do not appear in conventional financial statements, but it raises transaction gains and losses as foreign currency forward contracts, purchase commitments and future sales and long-term lease.

Understanding Risk Management

Risk management or self-employed people working in strategic areas, each day dealing with poor road conditions. Someone could have been sure to arrive at the office on time. However, conditions on the road no one knows, for example, a tree felled by the earlier rain, or the road is closed, or other factors which may cause obstruction of the trip.

Person’s ability to manage uncertainty in the streets is one form of risk management.
Similarly, the financial world. Risk is the uncertainty that will occur from each situation and the decisions we take. It’s just that the consequences of that risk management is reduced or loss of our funds.

DIFFERENCES IN RISK OF ACCOUNTING AND ECONOMIC RISKS

Management accounting plays an important role in the process of risk management. They assist in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the hedging program.

The basic framework is useful for identifying different types of market risk can potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company’s value and its competitors. The trigger value refers to the financial condition and operating performance items that affect the main financial value of a company. Market risks include the risk of foreign exchange rates and interest rates, and commodity and equity price risk. State the source of the purchase currency depreciates in value relative to domestic currency country, then these changes can lead to domestic competitors able to sell at lower prices, is referred to as the risk of facing currency competitive. Management accountants have to enter a function such that the probability associated with a series of output values ​​of each trigger.

Another role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Foreign exchange risk is one of the most common form of risk and will be faced by multinational companies. In the world of floating exchange rates, risk management include:

• anticipation of exchange rate movements,
• measurement of exchange rate risk faced by the company,
• designing appropriate protection strategies,
• the manufacture of internal risk management control. Financial managers must have information about the possible direction, timing, and magnitude of changes in exchange rates and to develop adequate defensive measures more efficiently and effectively.

EXCHANGE RATE PROTECTION STRATEGY AND ACCOUNTING TREATMENT NEEDED
Exchange hedging strategy can be done by:

• Balance Sheet Hedging

Protection strategy by adjusting the level and value of monetary assets and liabilities denominated exposed companies, which will reduce the potential risks facing the company. Example of a hedging method subsidiaries located in countries that are vulnerable to devaluation is:

• Maintain cash balances in local currency at the minimum level needed to support current operations.
• Restore the earnings above the required amount of capital to the parent company untukekspansi.
• Speeding (ensure-leading) the receipt of outstanding receivables dagangyang in local currency.
• Delay (slow-lagging) the payment of debt in local currency.
• Accelerate the payment of debts in foreign currencies.
• Invest surplus cash into the stock of debt other danaktiva in local currency which was less affected by devaluation losses.
• Invest in assets outside the country with a strong currency
• Operational Hedging

Focusing on operational hedging variables affecting revenues and expenses in foreign currencies. More stringent cost control allows a greater margin of safety against potential currency losses. Structural hedging include relocation of manufacturing to reduce the potential risks facing the company or changing the state is the source of raw materials and component manufacturing.

• Contractual Hedging

One form of hedging with financial instruments, both the derivative instrument and the basic instrument. This instrument products include forward contracts, futures, options, and the mix of all three are developed. To provide greater flexibility for managers to manage the potential risks faced by foreign exchange.

Accounting Treatment

Before a standard is created, global accounting standards for derivative products is incomplete, inconsistent and developed gradually. Most financial instruments, that are executable, be treated as items outside the balance sheet. Then the FASB issued FAS 133, FAS 149 is clarified through the month of April 2003, to provide a single, comprehensive approach to accounting for derivatives and hedging transactions. No IFRS. 39 (revised) contains guidelines for the first time provide universal guidance on accounting for financial derivatives.

Basic provisions of this standard are:

1. Instrument-derivative financial instruments are recorded on the balance sheet as assets and liabilities. Derivative instruments are recorded at fair value, including those attached to the main contract is not carried at fair value.
2. Gains or losses from changes in fair value of derivative instruments, not including the assets or liabilities, but are recognized as income if it is planned as a hedge.
3. Hedging should be very effective in order to deserve a special accounting treatment, the gain or loss on the hedging instrument exactly offset the gains or losses should be something that is hedged.
4. hedging relationship must be documented in full for the benefit of readers of the report.
5. Advantages / disadvantages of net investment in foreign currency (asset or liability position of the net exposure) were initially recorded in other comprehensive income. Subsequently reclassified into current earnings if the subsidiary is sold or liquidated.
6. Gains / losses from hedge against future cash flows are uncertain, such estimates of export sales, are initially recognized as part of comprehensive income. Gains / losses recognized in earnings when the transaction is expected to occur that affect earnings.

ACCOUNTING AND CONTROL PROBLEMS ASSOCIATED WITH RISK MANAGEMENT OF FOREIGN CURRENCY EXCHANGE RATE

Examples of accounting and control issues associated with the risk management of foreign exchange can be seen in the following cases:

These companies continuously create and implement new strategies to improve their cash flow in order to increase shareholder wealth. It does require some expansion strategy in the local market. Other strategies require penetration into foreign markets. Foreign markets can be very different from the local market. Foreign markets creates opportunities increased incidence of corporate cash flow. The number of barriers to entry into foreign markets that have been revoked or reduced, encouraging companies to expand international trade. Consequently, many national companies become multinational companies (multinational corporation) that are defined as companies engaged in some form of international business.

MNC own purpose generally is to maximize shareholder wealth. Goal setting is very important for an MNC, as all decisions must be made to contribute to the achievement of these goals. Any corporate policy proposals not only need to consider the potential return, but also its risks. An MNC must make decisions based on the same goal with the goal of purely domestic firms. But on the other hand, MNC companies have a much wider opportunity, which makes the decision became more complex.

There are several constraints faced by MNC companies such as, environmental constraints, regulatory constraints, and ethical constraints. Environmental constraints can be seen from the different characteristics of each country. Regulatory constraints of each country regulatory differences that exist such as, taxes, currency conversion rules, as well as other regulations that may affect the cash flows of subsidiaries. Constraint itself is described as an ethical business practices vary in each country. MNC, in doing international business, in general can use the following methods:

1. International trade
2. Licensing
3. Franchising
4. The joint venture
5. Acquisition of companies
6. Establishment of new subsidiaries abroad

 source :

http://wartawarga.gunadarma.ac.id/2012/04/eva-lestari-21208448-4eb11-tugas-softskill-akuntansi-internasional-bab-10/