The effect of translation exposure on the sustainability of public business enterprises in Rwanda. a case study of WASAC Ltd (2017-2019)

By The Rwandan Economist

Introduction

Translation exposure is the potential for an increase or decrease in the parent’s net worth and reported income caused by a change in exchange rates since the last transaction (Moffet,  et al.,  2003). In an accounting context, foreign currency translation is the restatement of accounting data expressed in one currency into another (Bogicevic, 2013). Accountants use various methods to insulate firms from these types of risks, such as consolidation techniques for the firm’s financial statements and the use of the most effective cost accounting evaluation procedures. In many cases, this exposure will be recorded in the financial statements as an exchange rate gain or loss (Fowler, 2013).

Exchange rate translation exposure measurement is important to all businesses because it affects them directly or indirectly. Translation exposure is related to firm size, multinational status, foreign sales, international assets, and competitiveness and trade at the industry level hence the firms must vigorously adjust their behaviour in response to exchange rate risk (Fowler, 2013). The necessity of foreign currency accounting contents translation is particularly evident in the recording of foreign currency transactions in the books of accounts and the preparation of an individual company’s financial statements as well as the consolidation of foreign subsidiaries’ financial statements with their parent company’s financial statements on condition that they are not expressed in a common currency (Bogicevic, 2013).

Translation exposure is one of the three types of currency exposure; the other two being transaction exposure and economic exposure. Exchange rate exposure is the risk of loss in company’s value or business’s operations due to fluctuations in currency values. Foreign exchange exposure is classified into three categories: Transaction exposure is the inherent risk that a company’s gains or losses will change favorably or otherwise upon the settlement of a foreign denominated obligation at a future date. Translation exposure arises from the need to “translate” foreign currency assets or liabilities into the home currency for the purpose of finalizing the accounts for any given period (Francis, 2010). Due to their unstable nature, floating exchange rates pose numerous risks when they fluctuate hence for businesses it becomes of utmost importance to monitor their exposure to exchange rate risk. All micro and macro-economic factors act as risk factors to exchange rate exposure since they affect the flow of money and foreign currencies (Fowler, 2013).

As far as the research issue is concerned, translation exposure affects the valuation of assets and liabilities in foreign operations which must be translated into the home country currency. The fluctuations in currency exchange rates could generate significant gains or losses and the entry of these into the income statement could produce a distorted impression of what is happening to the company (Watkins, 2014). Exposure to currency risk can be properly measured by the sensitivity of the future home currency values of the firm’s assets and liabilities and the firm’s operating cash flows to random changes in exchange rates (Francis, 2010). Translation exposure effect the risk of having changes in foreign exchange rates trigger losses on business enterprises transactions or balance sheet holdings. These losses can occur when a firm has assets, liabilities, equity, or revenue denominated in a foreign currency and needs to translate them back into its home currency. Furthermore, the business enterprises companies are facing challenges in order to achieve sustainable growth caused by translation exposure (Ekman & Gullstrand, 2006).  One of the key challenges for business enterprises in Rwanda is the change in value as a result of exchange rate changes. When a company engages in business foreign currency risk management becomes a crucial part of doing business and the business enterprises in Rwanda were not spared on this issue.

 Results and Discussion

Table 1:Category and population of study

CategorySize
General manager1
Purchasing manager1
Marketing manger1
Chief engineers 1
Production supervisors1
Auditor1
HR admin manager 1
Finance director 1
Procurement1
Marketing 1
Accountancy4
Total 14

1. Identification of respondents

This section presents the Identification of sampled respondents and entails the necessary characteristics of the respondents which include their gender, age, education level and years of service. Presenting these data enabled to obtain a clear picture of sampled respondents. 

1.1. Gender of respondents

Gender of respondents was assessed in this study. Here, the study wanted to establish the gender characteristics of the respondents and the respondents were asked to state their gender. Table 2 depicts the results obtained on this issue: 

Table 2:Distribution of respondents by gender

GenderFrequencyPercentage
Male1178.57
Female321.43
Total14100

Findings in table 2 show that majority of respondents 78.57% are male whereas 21.43% of respondents were female. This shows how WASAC Ltd makes an improvement and effort to sensibiliser its activities of the female community. This finding is supported by Alison and Woodward (2002) who described the working for gender balance requires examining the inner dynamics of decision-making organizations as well as the external efforts to affect the context of decision making. 

1.2. Age of respondents

Respondents were asked to present their age category to ensure that respondents are fully identified and the age distribution of respondents involved in the study and enables to determine the age segments which exists in the overall target population. Results are presented in the table.

Table 3:Distribution of respondents by age

AgeFrequencyPercentage
Between 21-25 years214.29
Between 26-30years428.57
Between 31-35 years535.71
Between 36-40years214.29
Between 41 and above17.14
Total 14100.00

Table 3 shows that 14.29% of respondents have between 21-25 years and 28.57% of respondents are in the age range of between 26-30 years, 35.71% of respondents have between 31-35 years, 14.29 % of responds have between 36-40 years whereas 7.14 % of respond have between 41 and above year old. From the table, the findings were established that majority of respondents were in their youthful and productive ages.

1.3.  Marital status of the respondents

The marital status of the respondents was also covered and analyzed to assess their views in relation to the study variables of relationship between translation exposures on sustainability of financial institution. This contained of those who were married, single, widowed, and separated/divorced.

Table 4:Distribution of the respondent’s marital status

Marital statusFrequencyPercentage
Single321.43
Married1178.57
Divorced00
Widow00
TOTAL14100

As seen in the table 4 above, majority of the study respondents constituting 78.57% were married and these were followed by respondents who were single as reported by 21.43 % of the respondents. None of the study respondents reported to fall under the category of separated or divorced. All these respondents of the study regardless of their status were willing to provide the information that was required by the study that helped in understanding the study problem that was under research. The results are supported by the study conducted by REMA (2011) as confirmed that the government teach all the population about the good relationship in the families.

1.4. Level of education of respondents

Here, the study wanted to identify respondents based on their education level and requested respondents to indicate their highest level of education. Table 5 displays their education levels. 

Table 5:Distribution of respondents by educational level

Level of educationFrequencyPercentage
Secondary level17.14
Bachelor’s level 642.86
Master’s level 750.00
Total14100.00

Findings in table 5 demonstrate that 7.14 % of all respondents have secondary level, 42.86 % of respondents have bachelor’s level, and 50 % of respondents have Master’s level.  The findings reveal that the majority of respondents have master’s level meaning that they are able to respond to the questions. In addition, this shows that employees of WASAC Ltd have some skills that can help them to analyze translation exposure on the sustainability of public business. The findings from the table was supported by Kothari (2003) which confirmed that the qualification of the respondents play a crucial role in providing the constructive information mainly as most of them are qualified in the field of the study.

1.5. Years of service within WASAC Ltd 

Experience of an individual is worth an asset since he/she has the ability and knowledge to perform well his/her duties. Hence respondents were requested to indicate how long they have been in working in WASAC Ltd  and the following table displays their views. 

Table 6:Distribution of respondents by years of service within WASAC Ltd 

Duration in serviceFrequencyPercentage
Between 1- 2  years 321.43
Between 3-4 years642.86
5 years and above535.71
Total14100.00

Findings in table 6 indicate that 21.43 % of respondents have worked for the organization for the period between 1-2 years and majority of respondents 42.86 % of respondents worked for WASAC Ltd in a period between 3 to 4 years whereas 35.71 % of respondents worked for this organization in a period of 5 years and above. About the improvement regarding the experience of employees of WASAC Ltd, the results obtained shows that the implication of more experienced employees can lead to the performance in general. And for the purpose of obtained information from the experienced employees is relevant and high reliable. Their experience is highly important to this study because the information gathered from them is more relevant to this study.

2 Translation exposure

This section covers findings from the specific questions that were asked in order to determine translation exposure in institution underwent and the impact on sustainability of public business enterprises.

2.1. Translation exposure in WASAC Ltd 

Respondents were asked whether they analyzed the translation exposure in WASAC Ltd and their views to the question are displayed in the table 7.

Table 7:  Respondents’ views on whether they analyzed the translation exposure in WASAC Ltd

AnswersFrequencyPercentage
Yes14100%
No00%
Total14100

The table 7 reveals that all respondents (100%) confirmed that they analyzed the translation exposure in WASAC Ltd in WASAC Ltd. As shown by all respondents, this implies that was done they analyzed the translation exposure in WASAC Ltd in other to achieve of public business enterprises. This is in line with Dominguez and Tesar (2005) found that firms adjust their activities in response to analyze translation exposure so as to improve on the value of the firm which translates exposure affecting the valuation of firms as reflected in the financial statements and ultimately its financial position.

2.2. The risks affecting WASAC Ltd which cause translation exposure

Respondents were asked whether the risks are my effect WASAC Ltd caused translation exposure and the table below depicts their views on the issue

Table 8:The risks affecting WASAC Ltd and which cause translation exposure

The risks my effect WASAC Ltd caused translation exposureResponsesFrequencyPercentage
Risk affecting a portion of  a company’s equities in a foreign currencyStrongly agree1392.86
Agree17.14
Disagree00.00
Total13100.00
Risk affecting a portion of  a company’s assets in a foreign currencyStrongly agree1285.71
Agree214.29
Disagree00.00
Total14100.00
Risk affecting a portion of   a company’s liabilities in a foreign currencyStrongly agree14100.00
Agree00.00
Disagree00.00
Total14100.00
Risk affecting a portion of  a company’s income in a foreign currencyStrongly agree1392.86
Agree17.14
Disagree00.00
Total13100.00

The table 8 indicates that 100 % of respondents were strong agree that risk affecting a portion of   a company’s liabilities in a foreign currency affecting WASAC Ltd and causing translation exposure. This implies that risk affecting a portion of   a company’s liabilities in a foreign currency affecting WASAC Ltd and causing the translation exposure on the sustainable of public business enterprises. The table above indicates that 92.86% of respondents were strongly agreed that the risk affecting a portion of a company’s equities in a foreign currency and risk affecting a portion of a company’s income in a foreign currency were affecting WASAC Ltd caused translation exposure, 7.14% of respondents were also agreed while 0.0% of respondents were disagreed. The table above indicates that 85.71% of respondents strongly agreed that the risk affecting a portion of a company’s assets in a foreign currency, 14.29% of responds were also agreed while 0.0% of responds were disagreed was effected WASAC Ltd caused translation exposure. This indicates translation exposure affecting WASAC Ltd to fail the sustainability. These findings are completed by Fowler, (2013) who noted that Translation exposure (also known as translation risk) is the risk that a company’s equities, assets, liabilities, or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities, or income in a foreign currency.

2.2.1. The measurement to control translation exposure in WASAC Ltd

Respondents were asked whether the measurement to control translation exposure in WASAC Ltd and the table below depicts their views on the issue.

Table 9:The measurement to control translation exposure of WASAC Ltd

The measurement to control translation exposureStrongly agreeAgreeDisagreeTotal

Freq%Freq%Freq%Total
To set a basis for measuring the translation exposure in order to control its risk.1392.8617.14
0

0.00

14
To improve the disclosure of the foreign operation and clarifying the foreign currency for each operation in order to measure the direct effect of the translation exposure rate on the sustainability of companies.14100.0000.0000.0014
Accountants can choose among several options while converting the values of foreign holdings into domestic currency. They can choose to convert at the current exchange rate or at a historical rate prevalent at the time of occurrence of an account.1285.712
14.29
00.0014

The table 9 indicates that 100% of responded strongly agreed that to improve the disclosure of the foreign operation and clarifying the foreign currency for each operation in order to measure the direct effect of the translation exposure rate on the sustainability of companies was the measurement to control translation exposure in WASAC Ltd. The table above indicates that 92.86% of respondents strongly agreed that to set a basis for measuring the translation exposure in order to control its risk but 7.14  % were agreed was the measurement to control translation exposure in WASAC Ltd.  It showed that 85.71% of responded strongly agreed, 14.29% were agreed that accountants can choose among several options while converting the values of foreign holdings into domestic currency. They can choose to convert at the current exchange rate or at a historical rate prevalent at the time of occurrence of an account was the measurement to control translation exposure in WASAC Ltd. This indicated that WASCA Ltd had the measurements to limit the translation exposure in order to be sustainable. These findings are in agreement by Bogicevic (2013) who states that a company can protect against the translation risk by purchasing foreign currency, by using currency swaps, by using currency futures, or by using a combination of these hedging techniques.

3. Sustainability of public business enterprises

This section covers findings from the specific questions that were asked in order to determine the sustainability of public business for example in WASAC Ltd  

3.1. Sustainability of public business enterprises

Respondents were asked whether WASAC Ltd was sustainable and their views to the question are displayed in the table 10.

Table 10:  Respondents’ views on the sustainability of WASAC Ltd 

AnswersFrequencyPercentage
Yes14100%
No00%
Total14100

The table 10 reveals that all respondents (100%) confirmed that WASAC Ltd was financially sustainable. As shown by all respondents, this implies that WASAC Ltd was sustainable after avoiding translation exposure in the three last years. This is in line with Meyer (2009) who said that the sustainability is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real income, profitability, customer and sales. 

3.2. The indicators of sustainability of WASAC Ltd  

Respondents were asked whether the indicators of sustainability of WASAC Ltd and their views to the question are displayed in the table 11:

Table 11:  The indicators of sustainability of WASAC Ltd 

The indicators of sustainability of WASAC Ltd 
ResponsesFrequencyPercentage
Profitability 
Strongly agree14100.00
Agree00.00
Disagree00.00
Total14100.00
Increased incomesStrongly agree1392.86
Agree17.14
Disagree00.00
Total13100.00
Increased customer
Strongly agree14100.00
Agree00.00
Disagree00.00
Total14100.00
Increased salesStrongly agree1392.86
Agree17.14
Disagree00.00
Total13100.00

The table 11 indicates that 100% of responded strongly agreed that profitability and increased customers were the indicators of sustainability of WASAC Ltd. This indicates that WASAC Ltd was profitable during the period of study caused by avoiding translations exposure. The table above indicates that 92.86% of respondents strongly agreed and 7.14 % were agrees that Increase its incomes and increased in sales were the indicators of sustainability of WASAC Ltd. This indicated that WASAC Ltd was increase sales and income in the tree years.  These findings are in agreement by Coupland (2005) states that sustainability is now increasingly recognized as central to the growth of emerging market economies. For the business sector, this represents both a demand for greater social and environmental responsibility as well as a new landscape of business opportunity.

4 Relationship between of translation exposure and the sustainability of public business enterprises 

Respondents were asked whether relationship between translation exposure and the sustainability of public business enterprises and the table below depicts their views on the issue.

Table 12:  Respondents’ views about the relationship between translation exposures and the sustainability of public business enterprises

AnswersFrequencyPercentage
Strongly agree00%
Agree00%
Disagree00%
Strongly agree0100%
Total14100

From the data tabled 12, 100% of responds strongly disagreed that there are negative relationship between translation exposures on the sustainability of public business enterprises. The responds said that there is a negative relationship between translation exposures on the sustainability of public business enterprises. These findings are in agreement with Harper (2010) who said that there is a negative relationship between the ROA and translation exposure. So, when the ROA increases one point, the translation exposure will decrease. Therefore, when the firm has high profitability, it will have high flexibility in pricing services and high ability to absorb any shocks more easily than firms with low profitability. 

4.1. The relationship between translation exposures and the sustainability of public business enterprises 

The objectives of this study were to find out whether there is a link between translation exposures on the sustainability of public business enterprises. Linear regression analysis was done in order to determine the explanatory power of independent variables whereby the ANOVA. Table was obtained and the estimated coefficients of the model.

4.1.1. Regression Models 

R represents the degree of correlation between the observed and predicted values of the dependent variable. The R value is 0.806, which indicates, the predicted values of dependent variable using the independent variables are strongly correlated to their observed value of dependent variables. R Square represents the degree of standard deviation in the dependent variable that can be explained using the independent variables. R Square value is 0.650 indicating that the independent variables are strongly associated with the dependent variable.

Table 13: Models Summary

ModelR SquareAdjusted R SquareS.E. of EstimateDurbin-Watson 
10.8060.6500.1100.3151.829

Adjusted R Square indicates that if there is an addition of extraneous predictors to the model it can add significant predictability to the dependent variable. As the value is 0.110, it can be concluded that the models are good fit in nature. The Durbin-Watson Statistic is used to test for the presence of serial correlation among the residuals and the value 1.829 signifies that the residuals are mostly uncorrelated.

4.1.2. Analysis of Variance (ANOVA)

As presented in table14, ANOVA statistics was conducted to determine the differences in the means of the dependent and independent variables to show whether a relationship exists between the two.

Table 14:ANOVA Model

DFSum SquareMeans SquareFSignificance F
Regression58.1061.62116.3070.000
Residual444.3740.099

Total4912.48


This table 14 shows that the p value is less than the significance level of 0.05. Hence we reject the null hypothesis. As all the Sig. values are less than the significance level i.e. 0.05, it can be concluded that independent variables are significantly different from each other. According to Gelman (2006), ANOVA statistics analyzes the differences between group means and their associated procedures (such as variation” among and between groups).

4.1.3. Regression coefficients of determination

To determine the relationship between the independent variables and the dependent variable and the respective strengths, the regression analysis produced coefficients of determination as presented in table below.

Table 15:Regression coefficient results


Unstandardized Coefficients
Standardized CoefficientsSig.

Std. ErrorBeta

(Constant)0.7510.0320.0210.027.000
Risk effect a portion of  a company’s equities in a foreign currency0.0210.0890.0060.033.001
Risk effect a portion of  a company’s assets in a foreign currency0.0440.0070.0380.085.001
Risk effect a portion of   a company’s liabilities in a foreign currency0.1550.0510.0290.029.000
Risk effect a portion of  a company’s income in a foreign currency0.0610.0200.0620.057.004
  1. Dependent Variable: sustainability of public business enterprises

Findings in table 15, reveal negative relationship between translation exposure and the sustainability of public business enterprises. Taking the regression model the established regression equation was: the sustainability of public business enterprises = 0.021 (risk effect a portion of a company’s equities in a foreign currency) + 0.044 (Risk effect a portion of a company’s assets in a foreign currency) + 0.155 (Risk effect a portion of   a company’s liabilities in a foreign currency) + 0.061 (Risk effect a portion of a company’s income in a foreign currency) A unit change in Risk effect a portion of  a company’s equities in a foreign currency would thus lead to a 0.044 change in the sustainability of public business enterprises ; a unit change in Risk effect a portion of  a company’s assets in a foreign currency would lead to a 0.155 change in the sustainability of public business enterprises  and a unit change in risk effect a portion of   a company’s liabilities in a foreign currency would lead to a 0.061 change in the sustainability of public business enterprises  while a unit change in risk effect a portion of  a company’s income in a foreign currency would lead to a 0.063 change in the sustainability of public business enterprises . This implies that Risk effect a portion of a company’s equities in a foreign currency, risk effect a portion of a company’s assets in a foreign currency, risk effect a portion of   a company’s liabilities in a foreign currency, risk effect a portion of a company’s income in a foreign currency are negativity significant determinants of the sustainability of public business enterprises of WASAC Ltd. These findings are in agreement by Fowler (2013) said that the risks of investing in equity include share price falls, receiving no dividends or receiving dividends lower in value than expected. They also include the risk that a company restructure may make it less profitable. Alternatively a company may fail. If this happens, you may be at the end of a long list of creditors and therefore risk not get the value of your investment back. 

Conclusion 

This study has been conducted with the main objective to analyze the effect of translation exposure on the sustainability of public business enterprises in Rwanda.The study established that Risk affect a portion of company’s equities, assets, liabilities and income are the indicators of translation exposure effect public business enterprises. Furthermore, the study demonstrated increase of income, profitability, increased customers, and increase of sales are the indicators of sustainability of public business enterprises in Rwanda. The study established that there is negative relationship between the translation exposures and sustainability of public business enterprises. Based on these findings the study concluded that translation exposure effect negatively the sustainability of public business enterprises in Rwanda.

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