Twenty years ago International Treasurer weighed in on functional currencies and who should use what when.
“While most companies manage their foreign worldwide exporters on a local currency basis, there is little economic justification for it,” we wrote in the September 19, 1994 issue.
This was mostly true for the companies International Treasurer referred to – tech industry types like software and semiconductors as well as commodities like oil, metals and other commodities. For more local sales, companies may just choose to stay with the local currency. Still, experts these days say all scenarios should be reviewed in order to minimize exposures and possible losses.
“Many companies are seduced into electing local currency for the functional currency of a foreign subsidiary, not because it is a truly independent operating entity, but because the accounting looks good in the first few years,” wrote Helen Kane, president of Hedge Trackers. “It looks good because the changes in value of the assets and liabilities of the subsidiary are revalued in OCI—where no one is looking. The intercompany balance on the other hand creates gains and losses in earnings—where everyone is looking (unless they have be designated long-term of an investment nature). This has a tendency to take management’s eyes ‘off the currency ball’: the true economic risk to the company is the USD value of the foreign currency receivables & payables, not the intercompany.”