Principle Of Financial Accounting Francisco -Myassignmenthelp.Com

Question: Discuss About The Principle Of Financial Accounting Francisco? Answer: Introducation Carlsberg is an international brewer employing approximately 41000 people who are located in Eastern Europe, Western Europe, and Asia. The company was founded in 1847 and is headquartered in Copenhagen, Denmark. It is primarily engaged in the marketing, sale, and production of soft drinks and beer. Further, its portfolio comprises of a range of cider and beer brands including Baltika, Holsten, Carlsberg, Tuborg, etc. Carlsberg is also prevalent in various markets wherein it does not operate its own breweries through export and license business (Carlsberg, 2016). Heineken Heineken is the leading marketer and developer of premium cider and beer brands with a strong portfolio of more than 250 global, local, and regional ciders and beers. The company is committed towards long-term brand investment, cost management, sales execution, and innovation. It employs around 73500 workforce who operates in more than 165 breweries, cider plants, malteries, and production facilities situated in around 70 countries. It was founded in 1864 in Amsterdam. Transaction exposures of Carlsberg Carlsberg foreign exchange transaction exposures are mainly derived from foreign currency exchange rate fluctuations, interest rate fluctuations, raw material risk, and credit risk. Foreign currency exchange rate Carlsberg is exposed to transaction risks on sales and purchases in currencies instead of functional currency of domestic entities. Besides, a significant portion of the Groups affairs take place outside Denmark and not in DKK currencies. Hence, foreign exchange risk can be considered a major transaction exposure for the Group and as a result, fluctuations in the exchange rate can possess a material impact on its financial statement (Jacque, 2010). This is the reason why Carlsberg intends to hedge 70-90% of future cash flows in currencies on a 12-month rolling basis (other than the functional currencies). Interest rate fluctuations The most relevant interest rate transaction exposure in the company relates to borrowings. Since the entire debt of Carlsberg is in DKK and EUR, the exposures of interest rate relate to development in interest rates in both currencies. Such interest rate risk is measured by the time period of net financial debt (Carlsberg, 2016). Besides, in order to avoid foreign exchange risk, the interest rate on borrowings must be in local currency but in case of Carlsberg, the interest rate level in domestic currency and the additional cost of financing in domestic currency is extremely high, thereby resulting into a foreign exchange risk (Pochon Jerome, 2011). The net interest paid by Carlsberg amounted to DKK 1003 million in comparison to DKK 1818 million paid in 2015. Such decline was because of lower interest-bearing debts. Raw material risk The company also encounters foreign exchange transaction exposure due to the purchase of malt, cans, and energy. Moreover, since the underlying market for specified categories of packaging and raw materials vary, transaction exposure is more likely to occur (Carlsberg, 2016). The cost of finished goods of the company enhanced by 11% because of such currency impact from the appreciation of the Russian rouble. Credit risk The company is also exposed to credit risks on several cash equivalents and cash that include fixed deposits, derivative financial instruments, and investments with a positive fair value as to whether the opposite party can meet their contractual obligations as they become due (Popper, 2012). The carrying value of DKK 3502 million in the year 2016 has enhanced from DKK 3131 million in 2015 that represents the maximum exposure of credit owing to cash equivalents and cash (Carlsberg, 2016). Foreign exchange currency rate fluctuations Heineken is exposed to foreign currency risk on future purchases, future sales, dividends, and borrowings denominated in a currency other than its functional currencies. Further, major currencies giving risk to such transaction exposures are Mexican Peso, US Dollar, British Pound, Euro, etc (Heineken, 2016). In 2016, the year-end US dollar exchange rate moved to 1.05 in comparison to 1.09 in 2015, thereby affecting the financial statements of the company. Since the company reports in Euros that has proven to be a stronger currency over these years, fluctuations in the aforesaid currencies can affect the overall company results (taking into account the export sizes from Eurozone to South Africa and the USA). However, the company also has hedging transactional exchange risks that assist it to postpone the impact of its financial outcomes (Heineken, 2016). This is why 10% strengthening of US dollar against the Euro has materially affected financial assets and liabilities of the company. Credit risk Heineken is also exposed to a risk of financial loss in the event of failure of counterparties to satisfy their obligations. Moreover, such exposure arises mainly from investment securities and customers of the company. Further, the interest rates decided by the company are based on a risk-free rate plus margin that considers the value of given security and risk profile of the customer (Heineken, 2016). Therefore, any variations in exchange rates can easily impact the income statement of the company. Commodity price risk Heineken is also exposed to foreign currency transaction exposure associated with price changes in its commodities that can affect its overall income. Further, the main commodity exposure is associated with the purchase of utilities, cans, malt, and glass bottles. In order to encounter such exposure, the company does not enter into commodity contracts except to address sale requirements and expected usage of the company (Batram Bodnar, 2012). This is the reason why market value of commodity swaps in 2016 was EUR 11 million in comparison to EUR 70 million negatives in the year 2015 (Heineken, 2016). Comparison of transaction exposures As both the companies pursue similar business operational nature in manufacturing, producing, and selling their cider and beer bottles that include dealing in foreign currencies owing to international relations, they are exposed to similar foreign exchange transaction exposures like commodity price fluctuations, exchange rate variations, and exposure of credit risk. For transaction exposure attained from fluctuations in exchange rate, the overall finance expenses of Heineken enhanced from EUR 409 million in 2015 to EUR 493 million in 2016. In contrast to this, the net revenue of Carlsberg witnessed a major fall by 4% because of fluctuations in foreign exchange during the year 2016. For transaction exposure attained from commodity price fluctuations, the market value of commodity swaps of Heineken increased from EUR 70 million (negative) to EUR 11 million. In contrast to this, owing to the appreciation of Russian rouble, the cost of finished goods of Carlsberg increased by 11%. For transaction exposure attained from the risk of credit facilities to customers, the carrying amounts of financial guarantees and assets to the bank for Heineken enhanced from EUR 7335 million to EUR 7354 million in 2016. The same has been witnessed by Carlsberg as its carrying amount of financial assets has also enhanced from DKK 3131 million to DKK 3502 million. Different transaction exposures It can be seen that Carlsberg is also exposed by fluctuations in interest rates whereas Heineken is not affected by such transaction (in 2016). This is the reason why fluctuations in interest rates have decreased the net payment of interest on the part of Carlsberg from DKK 1818 million in the year 2015 to DKK 1003 million in the year 2016. Tools for managing transaction exposures In order to hedge foreign exposures, Carlsberg makes way to enter into forwarding exchange contracts or net investment hedges. Foreign exchange contracts Since the Group holds various types of investments in foreign subsidiaries, it is clearly exposed to foreign exchange risks. Foreign exchange contracts are entered by the company to hedge such exposures. This is applicable to investments in CHF, CNY, RUB, and MYR. Further, the basis for hedging in such contracts is reviewed at least once in a year and the general parameters like cost and risk reduction are balanced (Ross, 2010). Nonetheless, in economic terms, possessing debt in foreign currency through forwarding exchange contracts assists the Group in hedging the future cash flow value of DKK that arise from particular transactions or operating affairs (Moffett et. al, 2009). Where the fair value adjustment of such forward exchange contracts cannot surpass the fair value of the investment, adjustments of financial instruments are identified in other comprehensive income; otherwise, these are identified in the income statement (John, 2011). In order to hedge foreign exposures, the company uses derivatives in their ordinary course of business. Basically, the company implements hedge accounting to reduce the impact of transaction exposure in its income statement (Christie, 2014). In the year 2016, Heineken has entered into various cross-currency interest rate swaps that have been reflected as cash flow hedges to hedge the risk of foreign exchange rates on the principal value and future interest payments of its borrowings in US dollars (Fun Resnick, 2011). Heineken has also utilized commodity swaps to hedge foreign exposures and its market value reflected a positive figure of EUR 11 million in 2016. The company has used EUR 23 million forward exchange contracts in 2016 for hedge accounting. Moreover, such figure was very less (EUR 2 million) in 2015. Conclusion In case of big companies like Carlsberg and Heineken, forward exchange contracts, swaps, and options can be easily utilized to hedge short-term foreign currency exposure. Besides, companies that transact internationally can use hedging contracts to eliminate transaction exposure (Story, 2010). In the case of Carlsberg, more foreign exchange contracts can be used on an additional level to prevent any losses that are generated from movement of foreign currency (Needles Powers, 2013). However, commodity swaps can also be used by the company to encounter commodity risk that can affect its financial outcomes as a whole. In contrast to this, Heineken manages its transaction exposure in an appropriate way by the use of interest rate swaps, commodity swaps, and forward exchange contracts to hedge its accounting (Pilbeam, 2009). This can assist the company in attaining better financial outcomes throughout the year. The concept o foreign currency transaction exposure and different tools for m ultinational companies has been studied in an in-depth manner by various experts over a period of time. Forward contract, as well as options can be used as a potent tool to hedge foreign currency that pertains to short-term and in tune to the large multinational (Eun Resnick, 2011). Further, it is even proposed that the utilization of the hedging contracts is the best method to eliminate the exposure of transaction, specifically for companies that have huge operations or trading with countries that contains huge movements of currency. References Bartram, S. M Bodnar, G.M 2012, Crossing the Lines: The Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets, Journal of International Money and Finance, vol. 31, no. 4, pp. 766792 Carlsberg 2016, Carlsberg Annual report and accounts 2016, viewed 21 January 2018 https://carlsberggroup.com/media/10899/carlsberg-group-annual-report-2016.pdf Christie, S 2014, Downside Leverage and Event Risk in Fund of Funds Portfolios, Journal of Alternative Investment, vol. 7, no. 3, pp. 68-75. Eun, C S Resnick, B. G 2011, International Financial Management, New York, NY: McGraw-Hill Heineken 2016, Heineken Annual report and accounts 2016, viewed 21 January 2018 https://yourenotgonnareadthis.heinekenusa.com/Heineken-NV-2016-Sustainability-Report.PDF Jacque, LL 2010, Global Derivative Debacles: From Theory to Malpractice, World Scientific. John C. H 2011, Options, Futures and Other Derivatives, Harlow: Pearson Education Moffett, M. H, Stonehill, A. I Eiteman, D. K 2009, Fundamentals of Multinational Finance, Boston, MA: Addison-Wesley Needles, B.E. Powers, M 2013, Principles of Financial Accounting, Francisco: Mc Graw-Hill Brook co. Pilbeam, K, 2009, Finance and Financial Markets, Palgrave Macmillan Pochon, F, Jerome T 2011, A Conditional Approach to Hedge Fund Risk, Journal of Alternative Investments, vol. 12, no. 2, pp. 64-77. Popper, N 2012, Rate Scandal Stirs Scramble for Damages, viewed 21 January 2018 https://www.cnbc.com/id/48143338 Ross, W.J 2010, Fundamentals of Corporate Finance, McGraw Hill. Story, L 2010, A Secretive Banking Elite Rules Trading in Derivatives, viewed 21 January 2018 https://www.nytimes.com/2010/12/12/business/12advantage.html