Currency's Impact on Earnings
One of the goals of many large businesses is expansion into international markets where there are new customers and growth opportunities. However, operating internationally, or using international suppliers, raises the issue of currency and changing exchange rates. As the value of currency changes, businesses feel the impact in a number of ways, including changes to their reported earnings.
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Exchange Rates
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Currency is a significant part of doing business internationally, because exchange rates are constantly changing. Exchange markets allow investors to buy and sell currencies, meaning that factors such as supply and demand, faith in financial markets and general economic trends all affect the relative value of currencies. While exchange rates change rapidly, consumer prices move much more slowly. This gives buyers who use certain currency advantages when their currencies rise in value and can buy more goods priced in a foreign currency that has fallen in value.
Currency Translation
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Many businesses, including the largest corporations, have some form of international operation. These operations generally make money abroad, taking in revenue in a foreign currency. When the company calculates its earnings for a fiscal quarter or year, it must first translate the revenue for each of its international divisions to a single currency, known as the home currency. When the foreign currency that a business earns revenue in has a relatively low value, it will make earnings appear low. The same thing happens if the foreign currency holds steady while the home currency rises in value, since international earnings can buy less of the home currency.
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Other Factors
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Currency can impact a company's earnings in other ways as well. For example, if an American manufacturer buys raw materials from a Canadian supplier, its expense will change based on the exchange rate between the U.S. and Canadian dollars. When the Canadian dollar is strong, the same goods will cost more. This means that net earnings will be lower once these costs, in U.S. dollars, are subtracted. Currency also alters competition among businesses in global industries. Businesses that sell in markets where currencies have high value can report higher earnings in a home currency than similar companies that do more business in regions where currency values are low.
Accounting
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Converting international earnings to a home currency is a requirement for standard financial accounting. This allows investors and analysts to measure performance in simple terms. However, some businesses choose to adjust their earnings for currency. Earnings reports can include notes that indicate the value of earnings using a prior year's currency averages, which offers a different view of performance unaffected by currency values.
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References
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