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Accounting for FX; the Do’s and Don’ts
08-07-2020 | Niki van Zanten
Let’s start by mentioning a phrase that I hear regularly and, to be honest, also use myself: ‘I am not an accountant, but…..’.
The urge to mention this phrase (usually targeted to an accountant while having an ‘I know it better’ attitude), can perhaps be traced back to the following reasons:
The first point could already result into great discussions. As companies are expected to adhere to certain accounting standards, these standards represent the objective part of these discussions. This results in real economics claiming an underdog position.
If companies have to choose between compliance on one hand and doing what works best economically on the other hand, the way to find the right balance is by training accountants about real economics. Many individuals working in treasury have an accounting background, which could be beneficial if that individual takes the economic approach and uses accounting knowledge convince business partners.
Let’s jump into some basic examples where accounting doesn’t reflect economic reality:
Entity A (EUR Functional) has a receivable of 1 Mio EUR and entity B (USD Functional) has a payable of 1.1 Mio USD. The Historic rate was 1.10 and cash flow occurred in USD. Entity A decided to book in EUR to avoid any FX reporting. The consequence is that there is indeed no FX exposure visible. However upon settlements all FX results suddenly appear.What a nasty surprise!
The best indication for FX effects in your books is obtained when the applied rates are close to the market rates. As you know there are many different sources for markets rates. The awareness of this fact is not visible in accounting.
If you do not segregate forward points in PL, you can have FX results when the currency in question does not move. That just sounds very strange to me and this also touches upon a bigger issue, namely the allocation of result on PL. In the case your FX does not land in a segregated PL line, or worse non-FX related results end in your FX PL,
this usually does not change the total PL. However this makes it extremely difficult to control FX results, as you need good exposure information as well solid controls in terms of realized results. Segregation of realized and unrealized FX is also a very helpful tool for the Risk manager.
Are companies run by accountants?
That question should be discussed over a beer or glass of wine. Right now, I will limit myself to some pointers on how to identify whether a case could be identified as an accounting issue or economics issue. It is actually very simple and should be done by treasurers and financial controllers, before any discussion occurs on what the actual problem is.
By comparing the accounting steps for each of the proposed solutions with the trades, you can identify where market risk arises and where accounting risk. The one can see that thes are not always the same. Furthermore, it might also be a good time to call for a specialist, if the right level of comfort is not met. This way of working also fits well with the absurd requirements of hedge accounting.
Regarding this topic, ask yourself whether you really need to apply hedge accounting. From my experiences, in most cases hedge accounting is applied only for one reason; to reduce the PL volatility in between hedging and the moment of cash flow for forecasted transactions. (especially true for listed companies).Taking an economic perspective, there is no benefit in hedge accounting at such a significant cost in terms of audits and administration . Hence, determine how high the cliff is, before you dive down into hedge accounting procedures.
Conclusion
In a perfect world with only blue skies and where work consists of having margaritas on the beach, there are no accounting requirements (and probably also no FX to manage). In our world, the same feeling can be obtained by making sure that the accounting for FX reflects economic reality as much as possible. Thisby applying the accounting standards as a framework. Furthermore take into account what level of known discrepancies between the economic and accounting reality you are comfortable with.
*Please note hedge accounting and accounting for FX are not the same. By accounting for FX I mean the accounting entries done by non-local or group currency items. These can be invoices in different currencies or intercompany bookings. Hedge accounting is only linked to deferring derivative MTM on the balance sheet as opposed to PL immediately.
I am curious about your thoughts. Please comment…
Niki van Zanten
FX specialist
Meet our Experts – Interview François de Witte
07-07-2020 | François de Witte | treasuryXL
After having worked for more than 30 years in banking, our expert François de Witte launched his own consultancy activity, FDW Consult, specialized in finance and treasury consulting. From 2014 to 2016, he was also Solution Partner Treasury & Finance at USG Professionals. Since then he took up several assignments, including one in the automotive sector with Ginion Group and with Ibanity, part of Isabel Group in the area of PSD2 and open banking. He currently is Senior Project Manager Treasury at Gaming1 (part of Ardent-Group). He is also co-founder and CFO of SafeTrade Holding. Key areas of expertise:
We asked him 11 questions, let’s go!
1. How did your treasury journey start?
My roots are not really in treasury, because I have spent 30 years in banking with ING. Mid-2013, I made a major career move to treasury & finance. I could thereby leverage on the expertise I acquired in both Corporate Banking and Payments & Cash Management.
2. What do you like about working in Treasury?
The diversity of topics and people with whom you are in contact. The treasurer monitors the cash & finance, and is in the frontline of the circulatory system of the company. In addition, in view of the technology developments and the globalisation, treasury is a fast moving discipline,
3. What is your Treasury Expertise?
Based upon a gap analysis, during the first couple of years, I strengthened my expertise in the other areas of treasury by self-training. I also started training in some subject matters, at the university and at other training organisations, and this is a good way to keep yourself updated on the latest developments.
4. Do you have examples of risk mitigation, creation of opportunities and/or cost savings?
I have done quite a number of consultancy assignments. In one of them, thanks to a complete review of the processes, including also the business, we managed to gain some 10-15 days working capital management. In another project, we reviewed the account structure and the bank lines and could generate substantial savings. During a treasury scan, I was able to identify foreign exchange risks, which had not been spotted by the management.
5. What has been your best experience in your treasury career until today?
In my current assignment, we have selected a TMS-solution (Kyriba) and are currently finalising the implementation. Simultaneously we created a cash pooling and an In-House bank and streamlined the processes.
6. What has been your biggest challenge in treasury?
When starting in treasury, I did not have experience on the field, and needed to switch from a banker’s approach to a corporate approach. If you want to be successful, you need to also have operational experience. I have spent at the start quite a lot to train myself and to get up to speed in treasury.
7. What’s the most important lesson that you’ve learned as a treasurer?
Cash is and remains king. It is very important to make the management aware of the importance of cash, even if a company is in a cash-rich position.
8. How have you seen the role of Corporate Treasury evolve over the years?
The Treasurer is becoming a business partner of the whole group. As a treasury, you get a good transversal view of the business flows. This is very nice because you are in the cockpit of the finance department.
9. The coronavirus is undoubtedly an unprecedented crisis. In general, can you elaborate on the impact this virus has on treasury from your perspective?
The COVID crisis was a wake-up call. It reminds us that it is important to keep the focus on cash and working capital management. It also highlighted the importance of good well-balanced banking relationships. During the last years, some corporates did not put the right attention to this.
10. What developments do you expect in corporate treasury in the near and further future?
Cash will remain dominant. In addition, we have the automation enabling to work more efficiently. I also see AI (Artificial Intelligence) as enabler, e.g. for cash forecasting. Blockchain will also add value in some areas, such as documentary trade.
11. What is your best advice for businesses without a Treasurer?
Even if you do not have the critical mass to justify a treasury department, give it the right attention. Try to understand the drivers of your cash generation and to identify the risks. I would also recommend to invest in a treasury management scan.
François de Witte
Founder & Senior Consultant at FDW Consult
Does your business need support in Treasury or a Treasury QuickScan?
5 examples for improving Financial Stamina
| 03-07-2020 | Stichting MKB Financiering | treasuryXL
It is quite easy to determine the financial stamina of a SME. Solvency is a reliable measure of this. If a company has a solvency of 35% or more, the company is in a healthy condition and has sufficient borrowing capacity for further growth. If the solvency is less than 35%, it is advisable to work on improving the condition. Borrowing money further affects solvency, so be cautious about this and work on improving the condition or improving solvency. The question now is: how?
Blog continues in Dutch language.
Actief de solvabiliteit verbeteren
Er zijn een aantal mogelijkheden om actief de solvabiliteit, lees financieel uithoudingsvermogen, van een bedrijf te verbeteren. We noemen vijf voorbeelden met daarbij de behorende kenmerken:
1. Winstinhouding
Door jaarlijks de winst aan het vermogen toe te voegen en geen of nauwelijks dividend uit te keren groeit het eigen vermogen gestaag. Een gezonde methode. Echter, deze vergt veel tijd. Het vergt soms jaren van sparen en de hand op de knip houden.
2. Balansverkorting
Het afstoten van overbodige activa en een scherper werkkapitaalbeheer (verkleining voorraad, sneller innen van debiteuren) voeren. Dit zijn eenmalige verbeteringen. Het aanwezige eigen vermogen verbetert er niet door.
3. Inbreng extra kapitaal door de ondernemer / aandeelhouder(s)
Net als winstinhouding is dit een gezonde methode; áls de aandeelhouders over middelen beschikken: breng het in! Op de spaarrekening levert het immers geen rendement. En dankzij de toename van het eigen vermogen kan de schuldpositie afnemen.
4. Inbreng kapitaal door derden
Kapitaal door derden inbrengen kan vanuit vrienden- of familiekring, maar ook via informal investors, participatiemaatschappijen en ROM’s. Een prima oplossing Hiermee kan snel een aanzienlijke verbetering van de vermogenspositie worden gerealiseerd. Overigens zijn veel ondernemers terughoudend: de ondernemer is niet meer enig aandeelhouder en moet dus meer verantwoording afleggen. Een argument dat voorbij gaat aan de voordelen: andere aandeelhouders brengen niet alleen geld in, ook vaak hun kennis, visie en netwerk. Het biedt extra kans op professionele groei van het bedrijf
5. Werknemersparticipatie
Dit is een instrument waardoor medewerkers van een bedrijf kunnen deelnemen in (certificaten van) de aandelen van hun werkgever. De medewerkers worden mede eigenaar van het bedrijf. Het levert naast (beperkt) extra eigen vermogen ook iets extra’s op: nog meer betrokkenheid en vaak positieve gedragsverandering. Deze vorm van financieren past in de moderne tijd waarin medewerkers meer onafhankelijk, bewust en vaak specialistisch opgeleid zijn. Een medewerkersparticipatie kan leiden tot extra (ver-)binding.
Eigen vermogen versterken niet eenvoudig
Hoe fraai deze opsomming van mogelijkheden ook is, in de praktijk blijkt het voor de meeste MKB bedrijven niet eenvoudig te zijn het eigen vermogen te versterken. Er zijn geen ‘eenvoudige’ loketten voor eigen vermogen zoals die er zijn voor vreemd vermogen (via banken en de non-bancaire kredietverstrekkers). Er is geen loket voor de MKB onderneming met een balanstotaal van € 300.000, die bijvoorbeeld behoefte heeft aan een eigen vermogensverbetering van € 50.000. Het ontbreken van zo’n loket voor eigen vermogen ‘drijft’ ondernemers dus automatisch naar de markt van vreemd vermogen.
Financieringsgraad te hoog door vreemd vermogen
Vreemd vermogen is goedkoop, fiscaal aantrekkelijk en goed verkrijgbaar. Dat heeft geleid tot een hoge financieringsgraad (dus lage solvabiliteit) van MKB ondernemingen. Gevolg: het financiële uithoudingsvermogen is aangetast én kan niet eenvoudig worden hersteld. Een dilemma dat vraagt om nadere aandacht.
Toegang eigen vermogensversterking MKB verbeteren
Een verbetering van de eigen vermogenspositie van MKB bedrijven leidt tot een verbetering van het financiële uithoudingsvermogen, hetgeen vervolgens de toegang tot overige financiering verbetert. Binnenkort gaan we nader in op de vraag: op welke wijze zou voor het MKB de toegang tot eigen vermogensversterking verbeterd kunnen worden?
Bron