Foreign Exchange Rate Hedging and SFAS No. 52 -- Relatives or Strangers?

Although increasing numbers of US companies are adopting foreign exchange and interest rate hedging programs, corporate activity in the forward exchange market dropped following the adoption of the new accounting pronouncement on foreign exchange, Statement for Accounting Standards (SFAS) 52. Changes in US foreign currency markets raise questions about the adequacy of applicable financial accounting standards. To explore the impact of SFAS 52 on US corporate hedging activities, a survey was conducted of a sample of US firms with foreign operations. The results indicate that translation exposure hedging undertaken with financial instruments did not cease upon implementation of SFAS 52, although it appears that it was reduced. Firms that no longer have to include all translation losses (gains) arising from foreign operations are more likely to have stopped or reduced hedging translation exposure. In some firms, the new standard triggered other changes in financial management practices.