What gives rise to accounting exposure to changes in the foreign exchange rate?
A)Holding common shares in a foreign entity
B)Holding preferred shares in a foreign entity
C)The accounting method used to translate the foreign entity's financial statements
D)The impact of exchange rate fluctuations on the present value of future cash flows

Question

Quizplus · Accepted Answer

The accounting method used to translate the foreign entity's financial statements determines the exchange rate at which foreign assets and liabilities are translated into the domestic currency. Changes in exchange rates can result in gains or losses on these translations, leading to accounting exposure.

Answer: D
 Fluctuations in exchange rates can impact the present value of future cash flows, thereby giving rise to accounting exposure. For example, changes in exchange rates may impact the value of foreign currency-denominated investments or the cost of foreign currency-denominated debt, leading to gains or losses that affect financial statements.

What Gives Rise to Accounting Exposure to Changes in the Foreign