Currency volatility: reduce uncertainty in an uncertain world

Many companies face a recurring challenge in their financial reporting: accounting for and disclosing the impact of foreign currency volatility on their earnings.  As the U.S. dollar continues to strengthen, the challenge shows no sign of going away. Falling oil prices, foreign national bank monetary policies, and other factors are all contributing to significant, worldwide currency swings the likes of which we haven’t seen in decades.  Given this, there are some key considerations for financial reporting.

One basic accounting aspect of the current currency volatility is that U.S.-based multinationals may report reduced foreign earnings because those earnings will be translated into fewer U.S. dollars. Companies must also account for the impact of any hedging programs they've used to mitigate currency risk.

Another financial reporting consideration is the need to disclose the effect of changes in currency. What I have said in other contexts holds true here: transparency is important.  It’s important that a company’s stakeholders understand the impact and potential persistence of the currency volatility.

MD&A can be used to provide both a high-level overview and a detailed look at key factors.  Broadly, management can explain the extent to which trends in reported amounts are due to currency volatility and the economic circumstances contributing to that volatility. 

At a more granular level, management might want to discuss significant foreign markets, their currencies, and the impact of those markets’ volatility on the company’s earnings.  In addition, companies may want to explain the use of multiple currency exchange rates, any operations in highly-inflationary economies, and the existence of foreign currency commitments and contingencies.  And, management should describe their strategies for managing currency risk (e.g., hedging programs) and identify material, un-hedged foreign currency items. 

While the foregoing might suffice, management may want to disclose non-GAAP measures.  Generally, companies disclose non-GAAP measures to offer additional insight into their businesses.  These measures – calculated by adjusting certain GAAP-reported results – may facilitate understanding of a company’s underlying operational performance, liquidity, or financial position.  

When it comes to currency volatility, constant currency reporting is the typical non-GAAP measure. These measures present core earnings without the effects of exchange-rate fluctuations.  While there are no rules governing their presentation (as they’re non-GAAP), they’re typically calculated by translating current balances at prior period rates.

 To be most useful, companies should calculate constant currency consistently from period to period, specifically disclosing how they calculate these measures.  And, companies should explain their utility, and show the GAAP measures with at least equal prominence.

In the end, foreign currency volatility creates enough uncertainty for U.S. multinationals.  One of management’s jobs is to reduce that uncertainty through meaningful disclosures that give stakeholders both the 50,000-foot and the street-level views. 

To further explore this topic, view PwC's In the loop: Financial reporting implications of foreign currency volatility - what can your company do? or join us on May 18, 2015 for a webcast Foreign Currency Considerations in Acquisitions and Dispositions from 1:00 p.m. - 2:30 p.m. EDT.