For this module I want you to discuss the following topic: “Should investors care about a multinational firm’s accounting exposure?”Accounting exposure is any exposure of a multinational firm’s consolidated financial statements to exchange rate movements. A multinational firm creates its financial statements by consolidating all of its individual subsidiaries’ financial statements. A subsidiary’s financial statement is normally measured in its local currency. To be consolidated each subsidiary’s financial statement must be translated into the currency of the multinational firm’s parent. Since exchange rates change overtime the translation of the subsidiary’s financial statement into a different currency is affected by exchange rate movements. In particular subsidiary’s earnings translated into the reporting currency on the consolidated income statement are subject to changing exchange rates. Instructions: 1- To read the point and counter-point of this argument and express yourown opinion on this topic : Point: Yes Investors do not have sufficient financial data to derive cash flows. They commonly use earnings as a base and if earnings are distorted so will be their estimates of cash flow. If they underestimate cash flows because of how exchange rates affected the reported earnings they may underestimate the value of the multinational firm. Even if the value is corrected in the future once the market realizes how the earnings were distorted some investors may have sold their stocks by the time the correction occurs. Investors should be concerned about a multinational firm’s accounting exposure. They should recognize that the earnings of multinational firms with large accounting exposure may be more distorted than the earnings of multinational firms with low accounting exposure Counter-point: No The present value of a multinational firm’s cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. Multinational firms should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned with the exposure of their financial statements to exchange rate movements. Value is about cash flows and investors focus on value 2- Two paragraph ( half page maximum ). 3- While in the discussion read the point and counter-point which I have provided on this topic then click on the forum in which you’d like to comment (point or counter-point).
