|How Currency Changes Impact Valuation|
Currency fluctuations must be considered when making value estimates for income trusts. Estimating the future impact on the income statement, balance sheet and statement of cash flows from changes in the $US vs $Cdn becomes important when the relative currency values have significant changes. The following guide identifies the direction of potential changes on the financial statements.
Impact on Income Statement and Balance Sheet
A rising $C and weaker $US is good for trusts that
|1. || Earn revenues in $C and have expenses in $C or better if their expenses are in $US. |
|2. || Have assets that located in Canada financed with either $C loans or even better if the loans are denominated in $US.
A rising $C and weaker $US is negative for trusts that
3. || Earn revenues in $US and have expenses in $US or worse yet, if their expenses are in $C. |
|4.|| Have assets that located in the US that are financed with either $US loans or worse if their loans are denominated in $C. |
Hedging Correctly Provides Temporary Relief
Some trusts have correctly anticipated the rising $C and locked in the purchase of $C to cover their currency exposure. Hedge contracts generally run no more than 2 years so this provides the benefit of time to adjust operating costs and also means no currency losses will be incurred in the hedge period.
Statement of Cash Flows
Currency gains and losses can be realized or unrealized. Realized means the amounts were actually incurred and directly affected cash flows. Unrealized means the amounts are only estimates based on current market values and have no immediate impact on cash flows. For example a Canadian trust may have a $US long term loan that results in a unrealized gain when the loan balance is translated to $C for inclusion on the financial statements. No cash will be generated, the amount is an estimate only. Unrealized gains/losses are generally much less significant than realized gains/losses when valuing trusts.
Produced by H.C. Levant, – Reproduction of this material in part or it’s entirety is subject to copyright licensing agreements and is forbidden except only with the express written consent of the author.
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