What is an accounting risk?

Accounting risk is the concept that the company's financial statements may need to be recalculated due to fluctuations in exchange rate exchange rates. It is also known as accounting exposure or translation risk. The phrase concerns the recalculation option and does not necessarily mean that the effect will be unfavorable.

The problem of accounting risk comes when the company owns assets in foreign currency. It could be cash. In more complicated situations, it could be all the assets of a subsidiary based in another country. If the exchange rate changes, the value of the assets will change to the company, even if the assets themselves remain unchanged. Accounting risk does not specifically mean the risk of losing the value of paper. Instead, this means a risk in a broader sense, ribbing with insufficient certainty.

The concept of accounting risk applies only to existing assets. Does not include the risk of swings of exchange coursescould affect future business. For example, a traveling entertainment company can visit a foreign country and book a tour for the following year. It may show that the exchange rate is moving unfavorable in the meantime, and when the tour attracts the same audience as a year ago, it would be more profitable instead of making more domestic data. Since the revenue of the hypothetical future sale is usually not counted in the current financial statements, the accounting risk usually does not cover this situation.

There are different ways of managing the problem of accounting risk. They may vary depending on accounting customs and culture in a particular economy. Which are permissible will depend on national laws.

In general, there are two main approaches to the implementation of the accounting risk provisions. One of them is simply to appreciate the assets using the actual exchange rate, which applies to the use of asset, known as a historical exchange rate. The second is to evaluate them using a exchange rate from a point whereare the accounts ready.

Supporters of the former method claim to show the basic value of assets and that the use of the current exchange rate is not relevant until the asset becomes converted to the local currency for the real. Supporters of the latter method claim to show a more realistic image. In some cases, the company will use a hybrid approach and announces monetary assets such as cash and securities, using current exchange rates, but physical assets such as stocks and machines, using a historical exchange rate.