A type of risk (price risk) that embodies the possible alternation in the fair value (FV) of a position or investment due to a change in foreign exchange rates. Entities are normally exposed to foreign currency exchange rate risk related to their international operations, such as non-functional currency intercompany debt (debt not denominated in an entity’s functional currency) and other non-functional currency transactions of their subsidiaries. For hedging purposes, entities usually use foreign currency (FX) forward contracts.
The accounting impact of the changes in fair value on the hedging contracts is recognized in other comprehensive income (OCI) and reclassified into earnings in the same period in which the hedged transactions affect earnings. For FX contracts that are not designated as accounting hedges, the fair value change impact is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
The key currencies that are associated with such risk against US dollar are the euro, Mexican peso, Swiss franc, Japanese yen, and Canadian dollar.
Comments