Global Finance 387The reduced level of currency risk-management in the case of translation
exposure is explained largely by the absence of direct cash f low and earnings
risk. There is a somewhat greater effort to manage remeasurement-related risk
because, unlike under the all-current method, remeasurement gains and losses
are included in net income. Some companies do hedge translation exposure
even though the translation adjustments are only included in other comprehen-
sive income, with this element generally going straight to shareholders’ equity.
However, the absence of an impact on earnings under all-current translation
makes it less likely that this exposure will be hedged.
Prior to the issuance of SFAS No. 52, Foreign Currency Translation,
SFAS No. 8, Accounting for the Translation of Foreign Currency Transactions
and Foreign Financial Statements,required all firms to use the temporal
method and to include all translation gains and losses in the computation of net
income.^35 As a result, one would expect the hedging of translation exposure to
have declined after the issuance of Statement No. 52. Under SFAS No. 52,
most translation is by the current-rate method and translation adjustments are
omitted from conventional net income. Available evidence supports this view.
For example, Houston and Mueller note: “In particular, firms that must no
longer include all translation gains or losses arising from their foreign opera-
tions in their income statements are more likely to have stopped or reduced
hedging translation exposure.”^36
To gain some insight into translation hedging practices, disclosures of
translation-hedging policies by a number of firms are presented in Exhibit 12.23.
The examples in Exhibit 12.23 are selective and do not represent the relative fre-
quency with which translation exposure is hedged. Rather, the disclosures are
simply designed to present some of the matters that appear to inf luence deci-
sions on the hedging of translation exposure.
Notice that AGCO does not hedge its translation exposure. However, it
attempts to achieve what could be called a natural hedge by the device of fi-
nancing its foreign operations with local borrowings. Increasing local-currency
borrowings reduces the net investment in the subsidiary—assets minus liabili-
ties—and with it translation exposure. This example suggests a potential for mis-
interpretation of company statements about their translation hedging. AGCO
apparently means that it does not use currency derivatives to hedge translation
exposure. However, it does attempt to reduce exposure by other means.
Becton Coulter indicates occasional hedging of translation exposure.
Note the reference to the hedge of the market (exchange rate) risk of a sub-
sidiary’s net-asset position. Again, in the case of translation with the all-
current method, exposure is approximated by a subsidiary’s net-asset position,
that is, assets minus liabilities. Becton Coulter must be making reference to
subsidiaries translated using the all-current method because it indicates that
any gains or losses on hedges of translation exposure are included in accumu-
lated other comprehensive income. This is also the location of the translation
gains and losses that result from the all-current translation method. The gains
and losses on the hedges of this translation exposure are included in other com-
prehensive income and offset, respectively, translation losses and gains.