It is December 1, 20X4, and you are a public accountant with a large national firm. One of your clients, Jamie Smith, the president of SpringForth, has called seeking your advice on several issues that have arisen recently.
SpringForth Inc. is a rapidly growing company in the social media space that has recently established numerous subsidiaries around the world. It is based in Toronto and was listed on the TSX exchange in early 20X4. In its most recent quarter, profits dropped significantly due to adverse changes in foreign exchange rates. Jamie notes that in the past the company has not hedged any transactions, in part because they had not been significant and movements had been favourable and in part because of the complexity and perceived cost. She is particularly concerned because of several recent transactions that have occurred and has approached you for advice on how to proceed. She would like you to provide an overview of the options available to her and the implications of each. In particular, she would like your recommendations on the following two issues that have arisen and are likely to be typical in the foreseeable future.
1. SpringForth’s growth has been primarily organic, but yesterday, after several months of negotiations, SpringForth agreed to acquire a competitor, SummerBreeze, a large privately held company based in London, United Kingdom. The acquisition closes on February 1, 20X5. The purchase price agreed to was £225 million.
2. SpringForth’s subsidiaries are growing rapidly, and its foreign currency transactions/ balances are increasing. For example, Jamie recently met with the management team of SpringUp, an Italian subsidiary, and noted that it now has significant exposure to the US dollar at $5 million in receivables. Another subsidiary, EverSpring, located in Australia, has $2 million in payables and $1 million in purchase orders that are denominated in US dollars.
Given SpringForth’s rapid growth, Jamie sees a future with even greater exposure to foreign currency fluctuations for her company. Further, given its leadership position in the social media space, she believes that its is also likely to be a consolidator in the industry.
Required
Prepare the report for Jamie Smith.
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