Accounting Exposure

Abstract

As defined earlier, accounting exposure is the exposure of financial statements to exchange rates. Exactly how accounting statements will be exposed to exchange rate changes depends on laws in different countries. Accounting exposure arises when a firm has foreign subsidiaries, and the financial statements of the subsidiaries are maintained in some other currency than the parent’s home currency. Typically the financial statements of subsidiaries are maintained in the local currency, that is, the local currency is the functional currency.For instance, a foreign owned South African company would have their revenues and costs in South African rand. Say that the South African company was wholly owned by a US firm. When the US parent draws up its financial statement, it does so in US dollars, which is the reporting currency. For accounting purposes the financial statements of the subsidiary, expressed in rand, have to be translated into US dollars as the parent prepares its financial statement. Accounting exposure is concerned with the effect of changes in the dollar exchange rate vis-à-vis the rand on the financial statement of the parent.