Assignment #2: Restating the Obvious

Yesterday was kind of the first post-Assignment 1 class so I figured it would be an opportune time to start restating my financial statements and kick-start Assignment 2. Over the Easter break I read a bit of Chapter 4 – probably the first couple of pages until I found part about exactly what we were meant to do in the 2nd tab of the spreadsheet. Thanks to a pretty timely and fitting case example of a chocolate factory (it was the Easter long weekend – did you time this Martin?), I marked off the O’s and F’s on OrotonGroup’s spreadsheet in preparation for yesterday morning’s class.

As it turns out, taking the time to undo the mess I made in my mind with regards to how hedges work in Assignment 1 was well worth the effort because I feel this was the only item that may have caused confusion in my financial statement items. Love it when a plan comes together.

Maria our Mackay lecturer went through the restating process for the Changes in Equity and Balance Sheet on the lecture theatre screen. So I went about inputting OrotonGroup’s figures with the view for Maria to check my work at the end of class. If you try to restate your financials as the lecturer does their example I find it’s super helpful because sometimes knowing exactly what to total is not so obvious, even if you have your head around the O’s and F’s.

By the end of class, and after discovering the integrity of my formula to calculate the 1% of cash in the bank was compromised, restating Changes in Equity and the Balance sheet was complete. Excellent. (Eggsllent)

 

Here is an excerpt from my Assignment #1 with regards to cash flow hedges and instruments. Turns out all those times you’ve hedged your bet on the tennis is also helpful to strengthen your understanding of accounting.

I love to confuse myself thinking about hedges work, but I think I cracked it with regards to OrotonGroup’s accounting of cash flow hedges, which are probably an easier type of hedging activity to work with. I suppose this is because I can visualise their international activities – seeing Oroton shops in international airports really does catalyse a connection between seeing the words ‘exchange rates’ or ‘international currency’ in a report and imagining foreign cash being traded for goods in action. What happens when that cash is banked at a store based in China at the end of the day? It’s going to have to eventually end up in Australia for reporting at least, and what might the company need to do to ‘hedge their bets’ if the value of their sales income is eroded due to poor exchange rates? Or what about stock that is purchased from manufacturers based in different countries and is effected by the weakening of the Australian dollar?

OrotonGroup uses hedge accounting to reflect the results of their hedging activities, as noted on their website around financial risk focusing on principles and policies to manage OrotonGroup’s exposures to foreign currencies and interest rates. From what I can gather, one of their strategies is to use a derivative contract (derivative financial instrument) – or forward foreign exchange contract to minimise the risk associated with foreign exchange exposure, that is it ‘locks in’ the exchange rate so there is certainty on the cost of goods. The risk potential for a weaker Australian dollar (or stronger US dollar, whichever way you look at it) to have a negative impact on the company’s margins from products purchased from US suppliers. A predetermined currency exchange contract ‘hedges OrotonGroups bets’ against the negative implication of currency fluctuations on their asset (stock) and thus its effect on profit and loss.

 

IMAGE: Lori Andrews
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