financial strategy & behavioral
TRANSCRIPT
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Financial Strategy & Behavioral Finance
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Framework for Risk Management
Components of Global Risk facing Multi-national Organizations:
•Cultural & Behavioral•Political•Economic
•Planning & Identification•Mitigation & Execution•Measurement & Reporting
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Enterprise Risk Mgmt•Determine Risk Profile
Organizational collaborationMarket toleranceMacro/Micro economics; scale & scopeEconomic scale refers to our size (total assets, equity and sales) while Economic scope refers to our diversity of operations; Foreign Direct Investment (FDI), including the number of geographic locations, and complexity of operations. While size reflects economic scale and foreign operations reflect economic scope, the level of income reflects both economic scale and scope. The level of income reflects economic scale because the size of the company influences the size of pre-tax income. The level of income reflects economic scope because the diversity of the company’s operations influences a company’s ability to offset losses with income from other business segments.
•Set goalsReview best practice
•Implement controls & execute policies•Identify, mitigate, & measure exposures
If necessary, account for transactions
•Monitor and manage exposure
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Enterprise Risk Mgmt
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COSO Framework
What is it? - COSO
Comprising the professional associations, the Committee of Sponsoring Organizations (COSO) is a voluntary private-sector organization. COSO is dedicated to guiding executive management and governance entities toward the establishment of more effective, efficient, and ethical business operations on a global basis. It sponsors and disseminates frameworks and guidance based on in-depth research, analysis, and best practices.
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COSO FrameworkThe COSO Internal Control Integrated FrameworkThe COSO Framework defines internal control as:
A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
Control environmentThe control environment is based on the individual attributes and attitudes of senior management of the Company – and will reflect their integrity, ethical values, competence and authority. The control environment is a foundation for all the other components of internal control and is the nature of the platform on which the whole organization is built.
Risk assessmentThis is the awareness and response of the Company to the risks that it faces.
Control activitiesControl activities are the policies and procedures that are designed and operate in order to manage and address the risks to the achievement of Company objectives.
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COSO Framework Con’tInformation and communicationInformation and communication systems are required to support the other four components in order to ensure the people in an organization understand, capture, exchange and record the information needed to manage and control risk in an organization.
MonitoringThe entire process, but particularly controls and processes, must be monitored to assess their effectiveness and to identify where modifications or remedial actions are necessary.
COSO Framework application to financial risk management:Effectiveness and efficiency of operations = Transactional & Operational risk: The effectiveness and efficiency of financial management. This would include the financial and operational objectives throughout the Company.Reliability of financial reporting = Financial accounting risk:Relates to the preparation of reliable financial information for inclusion in the financial statements and selected financial data derived from such statements, such as earnings releases, reported publically.
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Type of RISK Events giving rise to RISK
Transactional Acquisitions
Disposals
Mergers
Financing transactions
Cross-border [ICTP]
Internal reorganizations
Operational New business ventures
New operating models
Operating in new locations
New operating structures
Impact of technological developments
Compliance Lack of proper management
Weak accounting records or controls
Data integrity issues
Insufficient resources
System changes
Legislative changes
Revenue investigations
Financial accounting Change in legislation
Changes in accounting systems
Changes in accounting policies & GAAP/IFRS
Portfolio A combination of any of the events listed
Management Changes in personnel
Experienced tax staff lacking
New/inexperienced resources
Reputational Revenue authority investigation
Press comments
Court hearings/legal actions
Political developments
COSO Assessment Table
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COSO Response to RiskResponse to Risk
AvoidanceTaking alternative action such that the risk no longer arises, forexample by operating using a different model such as: i.e….– using arms length transfer price to avoid a transfer pricing tax risk; or– restructuring an asset disposal to be a sale of a shareholding in acompany owning those same assets; or– to operate through a legal entity with a different taxable status ina particular location
SharingTaking action to reduce the likelihood or impact of the risk by transferringor sharing the risk in some way. This generally achieved through thetechniques such as the obtaining of warranties or indemnities, obtainingprofessional opinions, or outsourcing of financial functions
ReductionTaking action to reduce the likelihood of the occurrence and/or theimpact of the risk, for example by:– carrying out appropriate financial planning; or– obtaining documentary evidence or opinions in support of theproposed financial treatment such as a valuation, or– restructuring the event to give a more favorable financial treatment e.g.by leasing rather than buying a capital asset; or– carrying out a detailed review of potentially disallowable expenditureto ensure all potentially allowable amounts have been identifiedand claimed
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Manage Risk
Model:
Identify Manage Monitor Report
This process can be used for complex exposures
What is the company risk profile?
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Architecture - Define and Identify Exposure
Treasury
Data collection
General Manager
Business locations
Goals, objectives, methodology Systems
[Identify, measure, monitor and report]
Collection & analysis
Business Controller
Corporate
Actions/decisions
Methodology, tools & strategy
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Formulate a strategy
• Model:
Identified exposure
Controller/exposure Analysis & data
Economic informationIndustry Information
Statistical InformationMarket Information
Contingency Plan
Strategy Execution
Identified exposure
Develop a View
Goals & objectives
Tax/Treasury
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Executing a Hedging Strategy
Implement internal hedge
Decision not to hedgeExecute external market hedge
Strategy
Implementation
Execution
Internal hedge opportunities
Financial institution knowledge
Hedge product knowledge
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Pulling it together?!
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Legal Entity Model
• What is your treasury business plan?
• What business design is needed? i.e.
– Typical buy-sell arrangement
– Limited risk distributor
– Contract manufacturer
– Commissionaire/FSO office
• What are the commercial treasury risks?
• What are your internal requirements?
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Legal Entity ModelsType Buy-sell Limited Risk
Distributor
Commissionaire Agent
Legal title of goods Distributor to customer,
DT has title
LRD to customer,
LRD has flash title
Principal direct to
customer
Principal direct to
customer
Invoicing the
Customer
Distributor invoices
customer
LRD invoices
customer
Commissionaire
invoices customer
Principal invoices
customer
Advantages Centralized inventory &
ownership
Centralized functions &
risks
Relatively simple to
implement
Low PE risk
Same face to customer
Central inventory risk
& ownership
Centralized functions
& risks
Relatively simple to
implement
Low PE risk
Same face to
customer
Central inventory risk &
ownership
Same face to customer
Low PE risks
Centralized functions
and risks possible
Central inventory
risk & ownership
Centralized
functions & risks
Relatively simple to
implement
Disadvantages AR on the books of
sales company
Higher reported sales
in local entity
Bears more risk; both
operational &
commercial
AR on the books of
sales company
Higher reported sales
in local entity; e.g. stat
reporting
Bears less risk; e.g.
currency exposure
VAT & Acc’t complex to
implement due to buy-
sell for VAT and
Commissionaire agent
for accounting
PE risks in common law
countries; e.g. UK
Two faces to the
customer [sales &
Invoice]
PE risk for principal
Conversion risk
may be higher
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Treasury Considerations• Capitalization
– Funding – relationship dictates wholly owned, minority interest, partnership, etc.
– Bank account establishment(s)• Purpose, control & authority
– Functional currency & reporting
– Transactional FX mitigation
• Thin Capitalization & intercompany loans– Debt to equity
• Capital Reduction– Steps
• Sale – asset/stock– Value Book versus Tax
• Wind-up/exit strategy