From the June 2008 issue of Treasury & Risk magazine

ERP Time Bombs

A rebounding dollar could spell big trouble for multinationals that don't have a good handle on their foreign currency exposures

While most corporate treasuries focus their efforts and resources on FAS 133 compliance, the most difficult accounting challenge they face is FAS 52, accounting for foreign currency revenues and expenses. Treasuries may not like FAS 133, but they do closely control the FAS 133 debits and credits. Not so for FAS 52, which is bound to become a much bigger issue when the U.S. dollar turns the corner and appreciates.

In fact, most treasuries have no knowledge of how well their company's general ledger or enterprise resource planning (ERP) system actually accounts for FX transactions. They simply assume that the FAS 52 multicurrency accounting is proper. As a user outside the ERP black box, it is difficult for treasury to detect any systemic misapplications because they are often partially offsetting, obscuring the true magnitude of the company's FX risks.

If FX exposures are not being measured in the GL, they will not be forecasted and treasury cannot hedge them. These hidden balance sheet FX exposures--and the cash flows that create them--sit there like a time bomb ready to explode when entries to correct the initial accounting are recorded, exposures change substantially or there's a sharp move in exchange rates. If the exposures are systemically misvalued, treasury's hedging increases P&L FX volatility.

ERP systems are especially prone to configuration errors because they do not have foreign currency subledgers that are automatically revalued. Instead, manual rules are needed to revalue specific accounts. These systems were set up by people who were not knowledgeable about FX, much less FAS 52. Even if an ERP system was initially configured correctly, has it been properly updated to reflect subsequent acquisitions, internal realignments and organic growth?

The most common process

errors to look for are:

1. Foreign currency transactions entered as functional currency transactions. The result is error-prone manual revaluations or no revaluations at all.

2. Revaluations on inter-company accounts that should be offsetting but are not due to timing, amounts and currency. Especially likely when there are multiple GLs.

3. Accounts that should be revalued but are not and accounts that are revalued that should not be revalued.

4. Inconsistent use of book FX rates and using budget rates rather than book rates.

If a GL or ERP system does not represent the consequences of the hedging and the actual exposures correctly, no treasury can fully protect the company's FX risks. The sad fact is that it often takes a major FX loss to force companies to review the accounting and find the hidden FX exposures and misvaluations. Since most U.S. multinationals are long foreign currencies, these ticking time bombs are likely to explode when the dollar finally rebounds.

Jeffrey Wallace is the managing partner of Greenwich Treasury Advisors LLC, which he founded in 1992. He wrote the "The G31 Report: Core Practices for Managing MNC FX Risk" (AFP) and the FAS 133 chapter of the International Finance and Accounting Handbook (John Wiley). Wallace, a CPA, was vice president of international treasury at American Express. For more information on FX risk and systematic FX accounting issues, visit greenwichtreasury.com, fxbestpractices.com and fireapps.com.

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