Movie Case Analysis
The scene shows Emily (played by Lara Dutta) translating a conversation between Raftaar Singh (played by Akshay Kumar) and Sara Rana (played by Amy Jackson). Raftaar is a small-time gangster. While Sara is also a gangster yet no one is aware. Raftaar asks Emily to inquire about Sara and why is she visiting Punjab. Sara replies that it’s none of his business. This makes Emily scared as she figures that Raftaar might kill both Sara and her. To pacify the situation, Emily starts translating according to her own understanding rather than what is being said. In this blog, Learning Perspectives will explore the meaning of translation risk.
What is Translation risk?
In finance, translation risk means a risk encountered by companies where the value of their assets, liabilities & income might change due to changes in the exchange rate. This is also referred to as an accounting exposure. Think of foreign companies operating in India or any other company that expresses its financials in a foreign currency. They are at risk of translation exposure.
How does this risk impact financials?
Multinational companies are most affected as they operate in different parts of the world. That means some assets will be based on foreign currency. While reporting financials, the assets and liabilities (balance sheet) are translated to the currency of the country that the company is headquartered in. For example, McDonald’s, and Starbucks, are some outlets that are found across many countries. These companies earn revenue from various countries which are later converted to American US dollars.
Accountants generally consolidate all the financials and use effective cost-accounting methods. While translating, it can either result in gain or loss for the company which is reported in the financial statements. Companies also reduce their risk of translation by hedging. Hedging is a popular strategy that helps in offsetting losses with the aid of an asset.
Example
When Starbucks purchased new land in Brazil. This became an asset for Starbucks and this should appear in the company’s balance sheet. If the Brazilian real depreciates then the value of the land in Starbucks balance sheet also declines. Even though the land is productive as before.
This loss is reflected in the downfall of the shareholders’ equity. Hence, this loss occurred due to a change in the exchange rate of the currency.
