An article in Forbes noted that “accounting rules.can often change the way companies do business.” Under the accounting rule covering receivables and payables denominated in foreign currencies, for example, “it is very important for companies to monitor their currency dealings.” A case in point is R.J. Reynolds Industries, which “opened regional treasury offices in London and Hong Kong to keep tabs on worldwide cash flow and direct local borrowings.” In that same article, a partner from a major accounting firm indicated that “more and more companies are centralizing their treasury-management function. Those that don’t may be operating at a disadvantage.”
REQUIRED:
a. Explain why the methods of accounting for foreign currencies might cause a company to centralize its treasury-management function and why those that don’t may be operating at a disadvantage.
b. What is one of the main strategies use by U.S. companies to reduce the risks of holding receivables or payables denominated in non-U.S. currencies?
c. Explain how the strategy in (b) works. Specifically, how might it be used to reduce the possibility of violating a covenant on an outstanding debt?