What Is an Accounting Risk?

Conversion risk, also called accounting risk and conversion risk, refers to the possibility of changes in the amount of certain foreign exchange fund items in the corporate balance sheet due to changes in foreign exchange rates.

Conversion risk

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Conversion risk is also called accounting risk and

Conversion risk is also called accounting risk and

When a conversion risk occurs, the amount of the items (assets, liabilities, income, and expenses) measured in foreign currencies must be restated in the national currency and must be carried out in accordance with the accounting regulations of the country where the parent company is located. When the company reports, in order to merge the assets, liabilities, income and expenses originally measured in foreign currencies into the domestic currency account, it must restate the amount of the above-mentioned items measured in foreign currencies in the national currency, also known as conversion restatement , It must be carried out in accordance with regulations established by the government of the parent company or the company itself.

Conversion risk is generally divided into income statement risk and balance sheet risk according to the types of financial statements. The company's cash flow statement is prepared on the basis of the above two tables, without the need to consider its conversion risk separately.

Conversion risk income statement risk

1. Under the current exchange rate method, all income and expense items are converted at the current exchange rate at the end of the period when they are converted (also converted at the current average exchange rate, and the average exchange rate is usually a simple average of the beginning and end of the period). Table items are subject to conversion risks;

2. Under the method of distinguishing between current and non-current items, except for depreciation of fixed assets and long-term deferred expenses, etc., which are converted at the historical exchange rate when the relevant assets are recorded without risk of conversion, all other income and expenses are carried out at the current average exchange rate. Conversion, so there is a risk of conversion;

3. Under the method of distinguishing between monetary and non-monetary items, the cost of sales items need to be calculated by converting the items on the left according to the equation of "beginning of inventory + purchase of the current period-ending of inventory = sales of the current period". Opening inventory and closing inventory are converted at historical exchange rates at different points in time without risk of conversion, but purchases in the current period are converted at the current average exchange rate, so there is still a risk of conversion in general;

4. Under the tense method, the conversion risk and the distinction between currency and non-monetary item methods are basically the same.

Conversion risk balance sheet risk

Enterprise equity projects are generally converted at historical exchange rates, so there is no risk of conversion. Although retained earnings items are converted into balances, they also actually contain conversion risks because they contain the retained portion of the current profit and loss. Other foreign currency assets and liabilities Different exchange reviews apply. However, as long as it is converted at the current exchange rate, there is a conversion risk.