386 Planning and Forecasting
Disclosed sales growth 0%
Breakdown of Sales-Change Components
Vo l u m e +5%
Price changes +2%
Currency depreciation −7%
Sales growth 0%The Praxair zero change in sales revenue in 1998 could be interpreted in
a manner that is too negative. After all, in the face of the zero growth in actual
dollar sales revenue, Praxair was able to increase prices and still improve sales
volume by 5%. Disclosure of quantitative details on the effects of the three el-
ements, volume, price and currency makes it possible to develop a much better
understanding of Praxair ’s 1998 business performance.
In the case of positive revenue growth, increases from volume or price
adjustments should be preferred to growth resulting from favorable exchange-
rate movements. Revenue growth driven by changes in exchange rates may
prove to be only temporary. Sustained revenue growth, in the absence of vol-
ume growth and /or price increases, would require ongoing strengthening of
foreign currencies—not a very likely prospect.
The effects of changes in exchange rates on sales and profits can be con-
trolled to some extent by management. As with most foreign-currency expo-
sure, management can elect to control or hedge this risk through operational
arrangements and currency derivatives. Much discussion of these matters has
already been provided. However, the focus of the next section is on the man-
agement of currency risks associated with foreign subsidiaries.
MANAGING THE CURRENCY RISK OF
FOREIGN SUBSIDIARIES
It is a common view that translation-related currency risk associated with the
statements of foreign subsidiaries is quite different from currency risk associ-
ated with foreign-currency transactions. Transactional exposure has the clear
potential to expand or contract the cash f lows associated with foreign-currency
asset and liability balances. If a U.S. firm holds a Japanese yen account receiv-
able and the yen falls in value, then there is a loss of cash inf low. If a Japanese
firm has an account payable in the U.S. dollar and the yen strengthens, then a
smaller cash outf low is required to discharge this liability.
There are no identifiable cash inf lows or outf lows in the case of transla-
tion gains or losses that result from either statement translation or remeasure-
ment. A study of both U.S. and U.K. multinationals found that “it was generally
agreed that translation exposure management was a lesser concern” (less than
transaction exposure management).^34 The Wharton survey results on hedging
(Exhibit 12.10) found the management of the volatility of cash f lows as the
major objective of hedging. However, it is very common for disclosures of
transaction-related currency hedging to cite the goal of protecting cash f lows.