CIMA Strategic level Managing risks associated with cash flows

Guide

1. When practicing, you should try and time yourself to exam conditions, as a guide use 1.5 minutes per question. If possible, you should also aim to have 5-10 mins at the end of the test to review your answers.

CIMA Strategic level Managing risks associated with cash flows

Corporate Earnings continue to be negatively impacted due to FX volatility and the impact is hitting the bottom line through diminished shareholder value. Cash flow forecasting, as a component of FX and liquidity risk management processes, can be the key in the preservation of corporate earnings and the realization of greater economic value generated offshore. Put another way, not having cash flow forecasting embedded as part of a broader set of FX and liquidity risk management initiatives is in effect jeopardizing the value of future sales revenues in non-functional currencies, not locking in the cost of goods sold and hence may impact restated earnings.

FX risk is now a key driver of corporate earnings volatility and hedging earnings has become even more critical given the increasing share of corporate profits coming from overseas.¹ The strengthening US dollar is driving North American based multi-nationals to better manage their currency translation risk to protect against diminished returns when restating their offshore earnings. While the majority of multinational corporates hedge to varying degrees, many US corporations have reported negative impacts from USD strength in recent quarters and the potential for more downside risk in coming quarters. FX Volatility is having a material impact on corporate earnings.² With history suggesting continued US dollar appreciation in the current cycle, there is an increasing need for corporations to review their FX and liquidity risk management practices and policies.

While there is nothing new in putting a currency hedging program in place to protect value generated from commercial activity offshore, enterprise wide visibility over future cash flows and anticipated currency positions provides a basis for the program’s effectiveness. On-demand visibility into the future aggregate cash position by date by currency across the organization is a prerequisite to enable identification of natural offsets and opportunities for internal hedging resulting in a reduced need for external hedging. A single chart or dashboard is required that presents the cash position by date by currency to a commercially meaningful time horizon. Measuring the accuracy of prior forecasts by date by currency enables a more informed next action minimizing future repair of hedges put in place or the early breaking of deposit contracts if liquidity buffers get stressed. Irrespective of industry or geographic location being considered, there are a number of best practices to consider:

CIMA Strategic level Managing risks associated with cash flows

The Chartered Institute of Management Accountants (CIMA) is a UK based professional body offering training and qualification in management accountancy and related subjects. It is focused on accountants working in industry, and provides ongoing support and training for members.

CIMA is one of the professional associations for accountants in the UK and Ireland. Its particular emphasis is on developing the management accounting profession. CIMA is the largest management accounting body in the world with more than 227,000 members and students in 179 countries. CIMA is also a member of the International Federation of Accountants.

CIMA operates a standard scheme of qualifying examinations for prospective members. It promotes local education, training and management development operations, and new techniques through its research foundation and the dissemination of management accounting practices through publications and other media related activities. CIMA has been active in recent educational and vocational initiatives in former Eastern bloc countries. It publishes a monthly journal, supplied free to members and registered students, called ‘Financial Management’.

CIMA is recognised as a professional accounting body for various statutory purposes by UK and various overseas governments. The institute regulates the activities of its members by a code of practice, a discipline committee and (a recent innovation) a continuing education scheme. Its governing body is its council, comprising members elected from regional branches. Each of the branches has a committee and is responsible for much of the ‘grass roots’ activity. Activity such as qualification development is undertaken from the London head office.

The CIMA Global Business Challenge, an annual international business and strategic management competition for undergraduates around the world, is designed to bring out the best in the young business leaders of tomorrow.

In July 2009, CIMA added an online community – CIMAsphere – to its website. The community consisted of a range of blogs, discussion boards, groups, community answers, expert Q&A sessions and some social networking features for members, students and the general public. This has since been shut down. Members are instead encouraged to join the CIMA LinkedIn group, and students are directed to CIMAconnect, an online study support portal.

In 2011, CIMA entered into a joint venture with the American Institute of Certified Public Accountants (AICPA) to launch a global management accounting designation called the Chartered Global Management Accountant (CGMA).In the Americas outside the U.S., non-U.S. CPAs can obtain the new designation as an AICPA International Associate, after a rigorous assessment process. In the rest of the world, new designation holders are able to become members of CIMA after the same assessment process.

CIMA is proactive to tie up with American CPA because of the current convergence trend between US-GAAP and IFRS, reinforced following the merger of the iconic New York Stock Exchange with Germany’s Deutsche Boerse AG. “It remains to be seen whether companies listed in a combined exchange would be required to report under IFRS, US GAAP or both, but as the US appears to be moving towards IFRS adoption it is more likely the international standards would be the accounting rules of choice”.

CIMA Strategic level Managing risks associated with cash flows

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CIMA Strategic level Managing risks associated with cash flows