Analysis of the AUD/GBP Exchange Rate in International Accounting

This report provides a comprehensive analysis of the Australian Dollar (AUD) against the British Pound (GBP) exchange rate within the context of international accounting. It begins with a graphical representation of the exchange rate over a five-year period, highlighting major peaks and troughs and their underlying causes. The report then delves into the concept of the 'trade weighted index' in relation to the GBP and its relevance to international accounting for Australia. It further examines the impact of GBP on international accounting by focusing on Rio Tinto, analyzing how the fluctuating exchange rate affects the company's sales and purchases, and the implications of predicted AUD values against the GBP. Additionally, it explores the foreign currency activities of Coca-Cola HBC AG. The report concludes by discussing other relevant aspects of international accounting related to the GBP, such as IFRIC 22, which deals with foreign currency transactions and advance consideration, offering insights into how these factors influence financial reporting and decision-making. The report uses multiple sources to provide a detailed overview of currency fluctuations and their implications for businesses involved in international trade.

INTERNATIONAL
ACCOUNTING

TABLE OF CONTENTS
PART 1............................................................................................................................................1
a) Constructing graph of Australian dollar against GBP for five year period from 1 July 2016
to 30 June 2020. Also construct daily graph for month of July ..................................................1
b) Highlights on graphs major peaks and troughs in value of AUD against GBP. .....................3
c) Causes of major peaks and troughs in value of AUD against GBP.........................................3
d) Predictions for AUD/ GBP as at 31 December 2020. ............................................................4
PART 2............................................................................................................................................4
'Trade weighted index' in context of the GBP.............................................................................4
PART 3............................................................................................................................................5
Relevance of GBP to international accounting for Australia.......................................................5
PART 4............................................................................................................................................5
(a) Research on Rio Tinto company which has interacted (through sales or through key
purchases) with GBP....................................................................................................................5
(b) Effect that the changing exchange rate of the GBP to AUD.................................................6
(c) Impact of the predicted value of the AUD in against the GBP on the company....................6
(d) Disclosure of the foreign currency activities of Coca-Cola HBC AG (CCH.L)....................6
PART 5............................................................................................................................................6
Other aspect of International Accounting relevant to GBP.........................................................6
REFERENCES................................................................................................................................8

PART 1
Australian Dollar and the British Pound
a) Constructing graph of Australian dollar against GBP for five year period from 1 July 2016 to
30 June 2020. Also construct daily graph for month of July
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GBP/AUD Graph for July 2020
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01/07/2020
02/07/2020
03/07/2020
04/07/2020
05/07/2020
06/07/2020
07/07/2020
08/07/2020
09/07/2020
10/07/2020
11/07/2020
12/07/2020
13/07/2020
14/07/2020
15/07/2020
16/07/2020
17/07/2020
18/07/2020
19/07/2020
20/07/2020
21/07/2020
22/07/2020
23/07/2020
24/07/2020
25/07/2020
26/07/2020
27/07/2020
28/07/2020
29/07/2020
30/07/2020
31/07/2020
0.535 0.54 0.545 0.55 0.555 0.56 0.565
AUD/GBP
AUD/GBP

b) Highlights on graphs major peaks and troughs in value of AUD against GBP.
c) Causes of major peaks and troughs in value of AUD against GBP
AUD/ GBP shows how much of Australian dollars are required for buying British pound.
It is known that British pound is at number four in most traded currencies of world with
Australian dollar at fifth place. Over the past five years there have been various fluctuations in
the price of AUD against GBP as could be viewed from the above graph. The graph reflects that
AUD has been falling down constantly. It could be seen that AUD performed strongly against
the British Pound from June 2016 to February 2017. The currency was traded by the investors
that increased the demand and also the economy was growing at stable rate which made AUD
strong against GBP (Polat, 2019). New trading partners brought cash flows and increased the
injections in country raising the prices.
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AUD started showing decline against GBP from February 2017 that continued till
February 2018. The decline in the period was seen to due to increasing interest rates by the banks
and financial institutions. Also decline was seen in iron ore trade which is major export segment
however the booming prices helped dollar to remain strong over the years (AUD/ GBP prices,
2020). Australia is holding dominant position in seaborne iron ore market.
Slight increase was seen in the currency in October 2018 and in may 2019 to October
2019. Growth was seen due to growth of industrial sector and the rising demand for the
Australian dollar. British pound due to increasing housing demand and increasing interest rates
showed decline which made AUD strong against GBP.
High interest rates in relation with global equity have been main reason of falling dollar
rates over the years(Andrikopoulos, Wang and Zheng, 2019). GBP being stable economy is
traded highly and helps in having strong position against other currencies.
d) Predictions for AUD/ GBP as at 31 December 2020.
The predictions for AUD against GBP based on economic environment it could be stated
that AUD will be becoming more stable as compared with other nations with RBA holding line
and recovery of China (Kikuchi and Kikuchi, 2020). It has showed decline over past period
against GBP but has shown strong performance against other currencies such as Euro and USD.
Also amid Brexit negotiations Pound is showing fall (Fall in Australian dollar, 2020). Faster
growth of economy will help AUD to strengthen its position it will raise over 0.582 in
December 2020 as per current global economic scenarios.
PART 2
'Trade weighted index' in context of the GBP
Trade Weighted Index refers to the measure of Australian dollar in broader trading
perspectives than that given by the reference to currency alone. TWI is the index of weighted
average value of Australian Dollar with respect to the basket of different currencies. The basket
includes the currencies of the trading partners that together makes up the 90% of the export and
import trade. There are currently twenty four currencies in the basket (Andrikopoulos, Wang
and Zheng, 2019). The weights of currencies in basket are re-assessed in every October on basis
of the trade figures for previous financial year. Importance of the other countries depend over
percentage of trading done with the country. For example in calculation of trade weighted index
of pound sterling most important rate of exchange would be with Euro. If UK exports 60% of the
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total exports to EU value of GBP To Euro will account for sixty percent of trade weighted index.
It is used for measuring overall performance of the currency. It is the economic indicator that
assists country in comparison of exchange rates of countries who are trade partners. Movement
of currency with currency of trading partner depicts greater share in economy of country. Trade-
weighted index is highly used in globalized economy and also misleads sometimes as amount of
exports valued destined for the country can deviate and value of products and services could be
affected due to changes in exchange rates of country (Golub, Glattfelder and Olsen, 2017).
Trade weighted index helps the organisation to analyse the impact of currencies over trading
transactions.
PART 3
Relevance of GBP to international accounting for Australia
When it comes to international accounting then Australia deals with many different types
of countries and for that they have to deal in the other currency only which is commonly the
GBP. Thus, the GBP is very relevant for the international accounting for Australia (Power,
Cleary and Donnelly, 2017). All the countries have to abide by the International Financial
Reporting Standard (IFRS) which includes same accounting principles to be followed by all the
companies irrespective of their geographic area. Thus, GBP is of relevance because in Australia
is dealing with many different countries and majority of country have GBP as their currency.
This analysis of the exchange rate is also necessary as if at the point of transaction, the exchange
rate is different as compared to the time at which the transaction is executed. Then this will result
in major impact over the accounting as the exchange rate is different and this will have a great
impact over the profitability of the company. On the flip side other than Australia all the
companies who are dealing in GBP as foreign currency will be interested in the currency value as
this will affect the accounting of the company. Other company like Coca Cola HBC AC operates
in GBP.
PART 4
(a) Research on Rio Tinto company which has interacted (through sales or through key
purchases) with GBP
Rio Tinto is the Anglo Australian MNC and is the leading world's 2nd largest mining
corporation. The company has transacted its sales and the purchases in the GBP. The company is
having a huge business operation in the various regions of Australia such as Pilbara, Weipa, Bell
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Bay Aluminium, Dampier salt, Gove, Boyne Smelter ltd, Argle and so forth. The company is has
grown through very wide because of the series of the M&A.
(b) Effect that the changing exchange rate of the GBP to AUD
The AUD has been declining having a huge impact over the profitability and operations
of the Australian company. In the situation where, the goods has been sold in the GBP for 1500
per unit which the payment is yet to be received and in case the exchange rate reduces to 1400
per unit. In such case, the company will be facing the loss of 100 per unit (Antonakakis,
Chatziantoniou and Gabauer, 2020). Therefore, under such circumstances the company should
go for future forward contract in which the future price is already fixed in order to reduce the
loss.
(c) Impact of the predicted value of the AUD in against the GBP on the company
The prediction done will boost the economy and will bring stability. On 30 June 2020,
the exchange rate was 0.55 and it has been predicted that on 31 December 2020, it will raise to
over 0.58 which will have a positive impact over the business operation. AUD's position will
also strengthen with the news of the potential vaccine (Baumgärtner and Klose, 2019). But then
too there is some risk in regard to the same. This will encourage more dealings in the GBP and
expansion of the business by increasing its sales.
(d) Disclosure of the foreign currency activities of Coca-Cola HBC AG (CCH.L)
Coca-Cola HBC AG is the company which has been involved in the foreign currency
activities. The company has provided the complete disclosure about the environment in which it
is operating, the revenue and the profits of the company are translated into GBP which has been
prevailing currently. Along with the activities, the company has also disclosed the foreign
currency risk which it is exposed to which provides help to the users in taking right decisions.
Therefore, the company has systematically disclosed all of it foreign currency transactions and
the business activities.
PART 5
Other aspect of International Accounting relevant to GBP
There are many different things related with the currency and the International
Accounting and the other aspect of International accounting is the IFRIC 22 which deals with
Foreign Currency Transaction and Advance consideration. This is an aspect which deals with the
transaction relating and including the payment and receipt of the foreign currency and has to deal
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with the accounting of that. This aspect is not applicable at time when the company measures the
asset, initial recognition and the different expenses at the fair value. Further this aspect of the
International accounting is very essential as this will assist the company in managing the
currency of the country and the proper recording of the transaction within the accounts of the
company (Ojo and Van Akkeren, eds., 2016). This is of relevance to the company as this will
assist in proper accounting of the company and will help the company in calculate proper and
effective profits which the company is actually earning because of the changes in the currency
rates. The major relevance is that when the date of transaction and the date of initial recognition
of the non- monetary transaction is different than data of each transaction is specified against of
each of the project.
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REFERENCES
Books and Journals
Andrikopoulos, A., Wang, C. and Zheng, M., 2019. Is there still a weather anomaly? An
investigation of stock and foreign exchange markets. Finance Research Letters. 30. pp.51-
59.
Antonakakis, N., Chatziantoniou, I. and Gabauer, D., 2020. The impact of Euro through time:
Exchange rate dynamics under different regimes. International Journal of Finance &
Economics.
Baumgärtner, M. and Klose, J., 2019. Forecasting exchange rates with commodity prices—a
global country analysis. The World Economy. 42(9). pp.2546-2565.
Golub, A., Glattfelder, J. and Olsen, R.B., 2017. The alpha engine: designing an automated
trading algorithm. High Performance Computing in Finance, Chapman & Hall/CRC
Series in Mathematical Finance.
Kikuchi, I. and Kikuchi, A., 2020. Particle swarm optimization and Hodge decomposition on
graphs.
Ojo, M. and Van Akkeren, J. eds., 2016. Value Relevance of accounting information in capital
markets. IGI Global.
Polat, O., 2019. Systemic risk contagion in FX market: A frequency connectedness and network
analysis. Bulletin of Economic Research. 71(4). pp.585-598.
Power, S.B., Cleary, P. and Donnelly, R., 2017. Accounting in the London Stock Exchange's
extractive industry: The effect of policy diversity on the value relevance of exploration-
related disclosures. The British Accounting Review. 49(6). pp.545-559.
Online
AUD/ GBP prices. 2020. [Online]. Available through :
<https://currencies.zone/historic/australian-dollar/british-pound>.
Fall in Australian dollar. 2020. [Online]. Available through :
<https://smallcaps.com.au/australian-dollar-continues-fall-more-to-come/>.
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