Years ago, about 20 years to be precise, balance-sheet hedging was still in a rather quaint and simpler world. In July of 1994, International Treasurer wrote, “Deciding whether or not to hedge balance sheet translation exposure involves an analysis of the nature of the business and the level of earnings repatriated to the parent.” (“Is it Real…or is it Paper?” International Treasurer, June 11, 1994).
The story went on to state some of the reluctance of why companies might choose not to hedge, mainly that the benefits of doing so can be opaque. “Discussions about the economic impact of balance sheet translation exposure are often confusing. Each participant has different assumptions about reality. The situation is further confused by FAS 52 [the Financial Accounting Standards Board’s Statement of
Financial Accounting Standards No. 52, which deals with foreign currency translation]. Functional currency accounting can cause an economic loss in dollar terms to be recorded as a P&L gain offset by a larger cumulative translation adjustment (CTA) loss.”
Unfortunately not a lot has changed in this regard as the problem is the same today. FAS 52/functional currency choice is still a factor in deciding whether to hedge or not.