Helping Clients Navigate Brexit: Hedging Against Currency Fluctuation Risk

Great Britain’s recent vote to leave the European Union quickly led to the largest drop in 30 years of the value of the British pound against the US dollar and has created significant uncertainty for organizations and their advisors, as they attempt to plan for the future. CPAs will be integral to assisting their clients as they navigate business decisions through this time of flux.

In addition to addressing the long-term effects of Brexit, which will require thoughtful strategy and planning. Be proactive by identifying clients who may require additional guidance and be prepared to help them evaluate and address their short-term currency fluctuation concerns.

Asking yourself the following questions can help you determine which clients may need assistance related to Brexit. Does your client:
  • sell a substantial volume to customers overseas?
  • rely on purchases from overseas-based suppliers?
  • have overseas-based foreign subsidiaries?

If you have clients doing business overseas, you can help them understand the types of risk in foreign currency fluctuations with these explanations:
  • Risk from translations occur when a subsidiary converts their assets and liabilities from the foreign currency to the domestic currency. This type of currency fluctuation risk is generally a more long-term issue unless a company is intending to dispose of a subsidiary.
  • Risk from transactions results from buying or selling goods and services in a foreign country, which create accounts payable or accounts receivable in a foreign currency. These assets or liabilities need to be revalued to the domestic currency at each balance sheet date.
    • Forward contracts, an agreement to exchange currencies at a specified future price (exchange rate) with delivery at a specified future time, may help hedge the risk from transactions and may be initiated with a local bank or financial services institution.

Learn more about helping your clients manage short-term currency fluctuation risk and monitor constantly evolving Brexit developments with CGMA resources.