We recommend applying any FX impacts after the core projections have been finalized. It is imperative to make sure "constant growth" growth rates are utilized for a fair and true comparison of YoY performance. This is covered in our Segment Build-up Course in which we review this very topic.

Hi! thanks for the explanation. Per your comment on applying FX impacts after the core projections, can you walk me through how you would do that through the 3 financial statements? Say USD1=EUR2 exchange rate, how would that impact the revenue, cost lines etc up to net income on P&L and similarly w... Hi! thanks for the explanation. Per your comment on applying FX impacts after the core projections, can you walk me through how you would do that through the 3 financial statements? Say USD1=EUR2 exchange rate, how would that impact the revenue, cost lines etc up to net income on P&L and similarly where would you include this FX impact on balance sheet and cashflow statement? Read More

The final numbers that would be reflected on the IS would also be NET of the FX impact. As such, it would flow through the BS and CF as normal, meaning no extra special adjustment needed. This assumes the company converts to reporting currency. The actual steps in the model would be done in the Segm... The final numbers that would be reflected on the IS would also be NET of the FX impact. As such, it would flow through the BS and CF as normal, meaning no extra special adjustment needed. This assumes the company converts to reporting currency. The actual steps in the model would be done in the Segment build-up portion which then flows through the IS.

If WMT sells a pen for EUR 1 in EuroLand and the EUR/USD rate is 1:1, then that is reported as USD 1. Next year, they sell the same pen for EUR1 but the FX rate changes to EUR/USD 2:1 then WMT simply reports only USD $0.50. That is already reflected on the IS correctly as USD $0.50 of revenue. Read More

Gotcha. (i) How about if you are trying to project a company whose 50% of revenue comes from international market (say more than 2 international markets) and 50% from the US. Given significant portion of revenue from overseas, is there a need to project FX effect into the model? If so, how to do... Gotcha.

(i) How about if you are trying to project a company whose 50% of revenue comes from international market (say more than 2 international markets) and 50% from the US. Given significant portion of revenue from overseas, is there a need to project FX effect into the model? If so, how to do this?

(ii) On the note of international revenue, for cash repatriated from overseas operation (for example from core operating revenue or non-core revenue e.g. short term investments), isn't there a restriction on how much cash you can repatriate back to the US and this will affect debt paydown? How does FX translation play into this scenario and also in the model? Read More

1) Please refer to our Segment Build-up course where we go through constant currency growth and how to implement exactly what you're asking.
2) There's no restriction - there's simply tax consequences!

Hi there! I have a follow up question based on your prior reply and I did finish the video on the segment build up as per your other comment as well: "The final numbers that would be reflected on the IS would also be NET of the FX impact. As such, it would flow through the BS and CF as normal, ... Hi there!

I have a follow up question based on your prior reply and I did finish the video on the segment build up as per your other comment as well:
"The final numbers that would be reflected on the IS would also be NET of the FX impact. As such, it would flow through the BS and CF as normal, meaning no extra special adjustment needed. This assumes the company converts to reporting currency. The actual steps in the model would be done in the Segment build-up portion which then flows through the IS.

If WMT sells a pen for EUR 1 in EuroLand and the EUR/USD rate is 1:1, then that is reported as USD 1. Next year, they sell the same pen for EUR1 but the FX rate changes to EUR/USD 2:1 then WMT simply reports only USD $0.50. That is already reflected on the IS correctly as USD $0.50 of revenue."
Follow up questions:
1. If you were to projected a listed company for next 5 years performance and you expect EUR to appreciate significantly from EUR/USD 2:1 to 1:1, how would you incorporate this in your projection?

2. In another scenario, if the company were to anticipate such appreciation and is using hedging to offset this, how would you model it out? Is there any case where hedging instruments that the company uses may backfire?

For example hedging may be a long term contract of 1 year but the EUR appreciates in 3 months but then depreciate sharply back to 2:1 after (before the 1 year contract lapse). I was thinking if the company were to use quite significant hedging and there is a huge swing in the fx. this can affect the liquidity in the short term (not sure if it will affect solvency in the long term) of the company and then the company may project EPS below consensus in the next quarter or next full year results which can form a catalyst for a short for the stock. I have no background in hedging instruments other than from the accounting bootcamp course from WST so I was hoping to get your insights on this.

Thank you!! :) Read More

1) Project as normal as explained in the WMT portion of the Segment build-up class. Then calculate the impact of the EUR move (make sure to apply against proper revenue amount that is affected, not the entire revenue or international revenue base) and then whether that is a plus or minus contributio... 1) Project as normal as explained in the WMT portion of the Segment build-up class. Then calculate the impact of the EUR move (make sure to apply against proper revenue amount that is affected, not the entire revenue or international revenue base) and then whether that is a plus or minus contribution to revenue, you can add that as a separate line item in the Revenue section to clearly show the impact.

2) Hedging gains/losses are a non-P&L impact to Equity, through the OCI account in Equity. Once the hedge is realized, you would recognize that gain or loss on the P&L through the appropriate line item (whether through "other" or interest/investment income as mgmt chooses). Note that most companies do not hedge since the cost of hedging is too high. Interest rate hedges are typically done (fixed to floating or vice versa).

3) Yes you're right. See this article: https://www.ft.com/content/67566f62-ab40-11dd-b9e1-000077b07658 Read More