512 CHAPTER 13. MEASURING EXPOSURE TO EXCHANGE RATES
13.4.1 Accounting Exposure of Contractual Forex Positions
The issue of how to book contractual exposures has been brought up already in
Chapter 5, where we argued that translation at the then prevailing forward rates
makes more sense. Still, many firms use the spot rate. The issue here is different,
though. Notably, if the firm has booked a contractual position in the past, should
it adjust the book value on the reporting date, and, if so, how?
A/P,A/R, deposits, loans For these items, bothUS GAAPand theIFRSrules
would agree, sensibly, that marking to market is recommendable; in the case ofIFRS,
that even is the general rule. Our earlier logic would then imply that the current
forward rate be used to translate the values ofA/R,A/P, deposits, loans, etc. into
hc. (Ideally, one would also correct for time value and changes therein byPV’ing
all numbers, but this is still too rarely done even thoughIFRSsupports this). Any
increase of the value of an asset would be balanced by an increased “liability”, the
unrealized capital gain that adds to the shareholders’ net worth. (Similar statements
can be made for losses, and for short positions, of course.) Being unrealized, many
managers would prefer that the gain would not pass through Profit&Loss first, but
IFRSbegs to differ.
Futures For futures hedges and the like, the same logic holds. Instead of men-
tioning a zero value off balance sheet for a futures contract, one can add a capital
gain or lossft,T−ft 0 ,T. This entry is the counterpart, on the liability side, of all
net marking-to-market cash flows that have been received from the Clearing Cor-
poration since the initial value datet 0 (or the beginning of the accounting period
if there has been at least one earlier financial report, which presumably contains
the gains/losses prior to that date) and, therefore, have already shown up in “bank
account”, on the assets side of the balance sheet. If the marking-to-market cash
flows have the character of a final payment rather than adjustments to security
posted—the tell-tale symptom would be that there is no interest earned on outward
payments, nor due on inward payments—then one could argue that the gain or loss
is realised and, therefore, should be shown as part ofP&Lrather than just as an
unrealized item among the shareholders’ funds. This is theFASBposition. TheIAS
position, as reflected inIFRS, is that all gains or losses have to be shown, whether
realized or not.
Note that, if the firm has taken out a futures contract to hedge another position,
and if that other position is not being marked to market and if the firm has to book
its marking-to-market cash flows on the futures as a profit or loss, then realized
profits become more volatile even though the hedging aims to reduce variability.
In that case, theFASBwould waive the requirement to book the gains and losses
viaP&L, provided the futures position was immediately designated as a hedge of
a well-identified balance-sheet item. There is no such rule for forwards (where, by
FASBrules, marking-to-market does not have to go throughP&L) or cash hedges
(where, presumably, the firm’s marking-to-market rules for hedge and hedgee are
always in agreement). But there is no similar rule either for exposures that are not