Giving a clearer picture with improved disclosures of foreign exchange and hedging

Investor View ()

What do investors want to know about foreign exchange?

Investors want to be able to forecast a business’ future cash flows. But they tell us that disclosures around foreign currency and hedging can make that task a challenge. In this ‘Investor view’, we look at what improvements to disclosure could benefit companies.

Investors want to understand the extent to which an entity’s underlying performance is affected by foreign exchange (FX) and any strategy in place to mitigate foreign exchange risk.

Current financial reporting standards only require disclosure of foreign exchange gains and losses as a single number, which is recorded in the income statement. Investors tell us that this is not enough.

The foreign exchange information that analysts around the world tell us they are most interested in is:

  • What are the drivers of the single FX gain or loss number reported in the financial statements?
  • What are the exposures the entity has to different currencies? And how are they managed?
  • What is the entity’s approach to managing FX risk? While this is required by IFRS 7, investors tell us management doesn’t make the risk management strategy as clear as they would like.
  • Was the latest year’s FX risk management strategy effective?
  • Has management moved production, or made other changes to its business or delivery model, to create a natural FX hedge?

This understanding of the entity’s strategy for managing FX exposure gives investors genuine insight into the quality and sustainability of performance.