Debating Daily vs. Single Rate Balance Sheet Exposure

Debating Daily vs. Single Rate
Balance Sheet Exposure

Kyriba.com Copyright © 2021 Kyriba Corp. All rights reserved. | Proprietary & Confidential
SVITLANA MURRAY
Treasury Director
Tech Data
Presenters
3
LAURA FISHER
Financial Risk Manager
Align Technology
ANDY GAGE
VP FX Risk Solutions
Kyriba
FIKRE BIZUNEH
Product Director
Kyriba

4
Today’s Discussion
• Introductions
• Overview of Daily Rate and Monthly Rate FX Program
Fundamentals
• Benchmarking Survey of Accounting Rate Trends
• Case Studies:
• Align Technology
• Tech Data
• Overview of Technology Enablers for Managing FX
Exposure Daily and Monthly Rate Environments
• Panel Discussion

5
Daily vs. Single Rate Environment
• DAILY RATE
Transactions are booked into the ERP
system using the market rate of the day
• SINGLE RATE Transactions are booked
into the ERP system using the prior month
rate from the last day of the accounting
month

Kyriba.com Copyright © 2021 Kyriba Corp. All rights reserved
6
Poll #1
What FX accounting rate does your
company utilize?
A. Daily
B. Weekly
C. Monthly
D. Other?

Daily vs. Single Rate Environment
7
Daily Rate Approaches & Challenges
● Monitor exposures very frequently; usually daily
or weekly
● Exposure data based on actual balances
captured from ERP systems
● Hedges maybe adjusted very frequently when
net exposure thresholds are breached
● Automation & Data Integrity are keys to success
● Automated daily rate programs tend to perform
very well on Net FX gain/loss
● Biggest challenge: Reconciling FX results due
to constantly changing exposures and FX
rates
Single Rate Approaches & Challenges
● Monitor exposures once or twice a month
● Exposure data is normally derived by some
type of forecast methodology (Direct,
Indirect, Algorithmically)
● Once the new FX rates have been
determined for the month, treasury team tries
to place hedges a quickly as possible to
eliminate rate risk
● FX gain/loss analysis is reasonably straight
forward to model and report
● Biggest challenge: Forecast Error

8
Kyriba FX Rate Research Background
• The m otivation behind this research is based on requests from com panies that
are considering changes to FX accounting rate conventions
• Research is com piled from 136 Com panies
• Research is based on prim ary data gathered from interviews and discussions
from com panies included in the research dataset
• One point of interest: Anecdotally, in over 15 years of working with clients, the
typical path of m igration is from Single Rate to Daily Rate. Based on the Kyriba
FX team ’s collective experience, we can not recall a com pany changing from
Daily Rate to Single Rate
• We do have experience with com panies that are transitioning their rate
conventions after an acquisition, as such the research is based on the desired
state versus the transition state.
Note: Custom Benchmarking Assessments can be performed for certain industries

9
High Level
Summary
of Rate
Conventions

Accounting Rates by Industry
10

SAP vs. Oracle - Accounting Rate Conventions
11

Accounting Rates - One ERP vs Multiple
12

Accounting Rates - by Region
13

Accounting Rates - By Size of Com pa n y in An n u a l Re ve n u e
14

15
Ca se St u die s

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17
Align: The Path to a Program
PRE
-SAP IMPLEMENTATION
● No centralized ERP system
● Regions forecasted exposures using various accounting platform –
many lacking visibility into foreign currency exposure data
● Exposure data was compiled in spreadsheets, which often contained
incorrect forecasting and exposure data
● Trading over the phone
● Paused balance sheet program to finish SAP implementation
POST-SAP IMPLEMENTATION
● Remeasurement is done systematically for all subsidiaries on SAP
● Moved from a daily rate to a monthly rate

18
Building Align’s Balance Sheet Program
RE-START OF ALIGN’S BALANCE SHEET PROGRAM
WITH Kyriba/FiREapps:
● Desire to build an automated, streamlined FX risk
management program
● Needed a solution that would expose errors in data, most often caused by incorrect system
setup or improper clearing of transactions in SAP
● Original goal was to mitigate exposure risk in the selling entity, representing 85% of balance
sheet exposures
Align Switzerland – which is USD functional currency; EUR, GBP, CAD, AUD, CNY and JPY
○ Expanded to Israel manufacturing facility -USD functional currency: ILS balance sheet
items
○ 2021 added USD exposures from intercompany equipment shipments to China
manufacturing – CNY functional currency

19
Align’s Kyriba -Enabled Balance Sheet
Management Program
● Regional forecasts are due 5 days prior to m onth-end
○ Regions forecast Cash, AR, AP, I/C and Accrued balances
● Use FiREapps historical (6-9 m onths) trended actual data to validate forecasts and
identify areas requiring additional support
● Developed an autom ated forecast in FiREapps based on param etric algorithm involving 3-m onth
straight line average plus or m inus an Align adjustm ent factor by entity and account group
● Use forecasts to determ ine hedging requirem ents and place hedges using FXALL
● Mid-m onth true-up process com paring forecast-to-actuals and adjusting outstanding hedges if
necessary
● Maintain hedge positions and trade repository within Trade Managem ent Lite
● Regions com plete m onthly forecast to actual variance analysis for any line item not within
accuracy range of 90% -110%
● Monthly, all regions are provided a hedge result scorecard by currency showing forecast to
accuracy percentage

20
Tech Data - Vital Link in the IT Supply Chain

21
Tech Data FX Risk Management Strategy
● Establish a form al, board-approved Financial Risk Managem ent Policy
○ Corporate Treasury developed and m aintains FX Risk m anagem ent global Policy and guidelines
docum ents
○ Objectives are to protect cash flows from the adverse effects of currency rate m ovem ents,
m axim ize the after-tax USD value of cash flows generated by industrial operations, subject to
containing risk levels within predeterm ined lim its, m inim ize the im pact of FX gains & losses on
consolidated financial statem ents and achieve predictability of FX gains & losses
● Understand exposure to currency risk
○ Assess exposures quantitatively - determ ine m ateriality and identify key drivers of portfolio risk
○ Assess exposures qualitatively – understand how fundam ental business processes contribute to
risks and design appropriate hedges from both econom ic and accounting perspectives
● Design an appropriate risk m anagem ent strategy consistent with goal and exposures
● Monitor strategy perform ance
○ Quarterly Regional FX Operating Com m ittee m eetings to ensure prudent control over risk
m anagem ent process, m onitor whether the hedging strategy is achieving the risk m anagem ent
goal, com ply with relevant regulatory and accounting requirem ents

22
Risk Management Process
● Established autom ated daily feeds from SAP to FiREapps of actual foreign currency m onetary account
balances for all entities
● Developed param etric algorithm s in FiREapps for internal exposure aggregation across each region and
docum enting hedge decisions
○ Use actual prior-day exposure balance each day to determ ine hedging requirem ents
○ Local (country) accounting team s daily confirm exposure balance above pre-set thresholds prior to
Treasury executing a hedge
○ No true-ups or forecasts necessary
● Wherever country regulation perm its, net all FX exposures for all subsidiaries in FiREapps and execute only
net hedges with third party banks from our Central Trading Entity , which will be the counterparty to all
internal hedges
● Hedge 100% of identified balance sheet exposure and all confirm ed m argin exposure (forecasted
transactions, backlog orders, etc)
● Utilize a net rolling hedge strategy, hedge book m aintained in SAP
● Monthly Central Treasury executes revaluation of hedge book, sending internal hedge revaluation journal
entries to each subsidiary.
● Monthly P&L gain/loss for each subsidiary above established thresholds are analyzed by Central Treasury
● Data tracked at legal entity / com pany code / exposure type level

23
Be n e fit s
● Dynam ic pricing of products sold in export m arkets
● No need to forecast exposures or FX rates, daily process aligns transaction rates with hedge
rates m inim izing P&L FX variances
● FX losses arise due to delays in transaction booking (backdated m anual posting) or errors in
data (incorrect clearing of transactions in SAP)
● FiREapps workflow enables stream lined approach to hedging in a daily-rate environm ent and
allows centralization of exposure hedging, and reporting
● Autom ated end-to-end hedging process, regardless of how m any entities are included in daily
exposure netting
● Integration with In-House bank

24
Te ch Da t a Ba la n ce Sh e e t FX Exposu re
Ma n a ge m e n t Progra m Ove rvie w
● FX rates are set and uploaded daily
● Prim arily one core SAP instance com pany-wide
● Hundreds of legal entities, with continual acquisitions/integrations
● Goal of the FXm anagem ent program is to dam pen the im pact of FX on our P&L
for a reasonable cost
● Monitor exposures and adjust hedge positions on a daily basis
● xx FX currency pairs m anaged, prim arily
● Hedges executed through a com petitive process, prim arily over Fxall, with tenors
up to 6 m onths for balance sheet hedging
● External trades are netted into a single currency pair trade at the group level and
hedge results are allocated autom atically to legal entities that generate the
exposure

Enabling Technologies

2
6
Single Rate: Forecast Workbench

2
7
Single Rate: Forecast Workbench

28
Single Rate: Hedge Performance Analytics

29
Daily Rate: FX Gain/Loss Analysis

30
Daily Rate: FX Gain/Loss Analysis

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31
Poll #2
If you could improve one aspect of your FX
exposure management program, what would
it be ?
A. Increased automation and integration
B. Improved exposure and risk analytics
C. Improved compliance and controls
D. Other
E. No improvements needed

32
Pa n e l Discu ssion

Panel Discussion:
What factors influence the choose of
FX accounting rates?
• Auditors
• Business Model
• Geographic/Market Operating Requirements
• Competition
• Business Maturity
• Others
33

Panel Discussion:
What factors should be considered when
adopting a new FX rate convention?
34
• ERP System Capabilities
• Accounting Resource Impacts
• Treasury Resource Impacts
• IT Resource Impacts
• Rate Provider Capabilities and Support
• Operational Impacts on FX Risk Management,
Accounting and Period -end FX Gain/Loss Reporting
• Others…..

Questions?
35

Debating Daily vs. Single Rate Balance Sheet Exposure

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