We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is an Accounting Risk?

John Lister
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Accounting risk is the concept that a company's financial statements may have to be recalculated because of fluctuations in currency exchange rates. It is also known as accounting exposure or translation risk. The phrase refers to the possibility of recalculation and doesn't necessarily imply that the effect will be unfavorable.

The problem of accounting risk comes when a company owns assets listed in a foreign currency. At its simplest, this could be cash. In more complicated situations, it could be all the assets of a subsidiary company based in another country. If the exchange rate changes, the paper value of the assets to the company will change, even if the assets themselves remain unchanged.

It is, of course, perfectly possible that the exchange rate's change could make an asset more valuable rather than less valuable. Accounting risk does not specifically mean the risk of losing paper value. Instead it means risk in the wider sense, that being the lack of certainty.

The concept of accounting risk only applies to existing assets. It doesn't cover the risk that exchange rate fluctuations could affect future business. For example, a touring entertainment company may do well visiting a foreign country and book a tour for the following year. It may turn out that the exchange rate moves unfavorably in the meantime and, even if the tour attracts the same audiences as the year before, it would have been more profitable to have instead performed more domestic dates. As the income from hypothetical future sales isn't usually counted in current financial statements, accounting risk doesn't normally cover this situation.

There are differing ways of coping with the problem of accounting risk. Which are favored may vary depending on accounting customs and culture in a particular economy. Which are allowable will depend on national accounting laws.

As a general rule, there are two main approaches to making provisions for accounting risk. One is to simply value assets by using the actual exchange rate that applied when the assets were applied, known as the historical exchange rate. The other is to value them using the exchange rate from the point at which the accounts are prepared.

Supporters of the former method argue that it shows the underlying value of the assets and that using the current exchange rate is irrelevant until the assets come to be converted into local currency for real. Supporters of the latter method argue that it shows a more realistic picture. In some cases a firm will use a hybrid approach, listing monetary assets such as cash and securities using the current exchange rates, but physical assets such as stock and machinery using the historical exchange rate.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister , Former Writer
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.

Discussion Comments

John Lister

John Lister

Former Writer

John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.