ACCA Strategic Professional · Advanced Financial Management

The role of the treasury function in multinationals: formula sheet

Full chapter guide

Key formulas

Treasury objectives checklist: Liquidity + Funding + Currency risk + Interest rate risk + Strategic support; Use this as a structure for any 'role of treasury' answer. It is a memory aid, not a calculation.
Net exposure after internal netting: Net exposure = Total receipts in a currency − Total payments in the same currency; Hedge only the net amount externally. Netting works only where the same currency flows in both directions.
Cost centre versus profit centre: Cost centre: minimise cost and risk. Profit centre: earn returns from treasury activity.; Profit centre status raises the risk of speculation. State the control needed.
Cost centre test: Success = service delivered at or below budgeted cost, with risk reduced; Treasury is not expected to earn a trading profit. Judge it on cost control, hedge effectiveness and service quality.
Profit centre test: Treasury profit = internal charges to subsidiaries + external gains − treasury costs − losses; Only part of the profit should come from genuine services. Profit from open positions is speculative.
Hedging versus speculation: Hedge = position that offsets an existing exposure; Speculation = position that creates new exposure; Use this test to classify any treasury deal in a scenario.
Control framework: Policy + limits + segregation of duties + independent reporting + audit; Needed in both models, but essential in a profit centre.
Netting saving (exposure): Net exposure = Σ receipts in a currency − Σ payments in the same currency; Only the net amount needs hedging or converting. This reduces hedging volume and transaction costs.
Bilateral netting: Net payment = larger amount owed − smaller amount owed between two companies; The company owing more pays the difference. Use the same currency, or convert at an agreed rate first.
Multilateral netting: Net position of each company = Σ receivables from group − Σ payables to group; Net payers pay the centre; net receivers are paid by the centre. Net positions across the group sum to zero (before costs).
Interest saved by pooling: Saving = (Borrowing rate − Deposit rate) × Surplus cash used in place of borrowing; Applies where surplus in one unit offsets borrowing in another. Adjust for the period in years.
Net cash remitted by dividend: Net cash to parent = Dividend − withholding tax − any extra parent tax after credit; Dividends come from after-tax profit, so there is no local tax deduction. Check whether a tax credit is given for foreign tax paid.
Tax saving from a deductible payment: Tax saving = Payment × local tax rate; Applies to royalties, management charges and interest if they are deductible. Then deduct any withholding tax on the payment.
Total group tax on a route: Group tax = Local tax (after deductions) + withholding tax + parent-country tax (after credits); Compare routes by total tax or by net cash received by the parent. Be consistent.
Effect of a transfer price change on group tax: Change in group tax = Profit shifted × (tax rate in receiving country − tax rate in giving country); Shifting profit to the lower-tax country saves tax. Assumes the price change is accepted by the tax authorities.
Arm's length principle: Transfer price ≈ price agreed between independent parties in comparable circumstances; Methods include comparable uncontrolled price, resale price and cost plus. Authorities can adjust prices that depart from it.
Net position of each company: Net position = Σ amounts to be received − Σ amounts to be paid; Positive means net receiver. Negative means net payer. Convert every amount to one currency first.
Netting check: Σ net payments = Σ net receipts; If the totals differ, you have missed or mis-converted an amount.
Gross flows removed by netting: Reduction = total gross payments − total net payments; Use the total of net payers (or net receivers), not both added together.
Transaction cost saving: Saving = reduction in gross flows × cost rate (% per transfer or conversion); State your assumption about how the cost is charged. Costs may be a percentage or a fixed fee per payment.
Net exposure from matching: Net exposure = foreign currency receipts − foreign currency payments (same currency, same date); Only this net amount needs external hedging.
Net exposure to hedge: Net exposure = Receipts in currency − Payments in currency; Net first using matching and netting. Hedge only the remaining exposure. Hedging more than this is speculation.
Hedge ratio: Hedge ratio = Amount hedged ÷ Underlying exposure; A ratio above 100% means part of the position is speculative. A policy often sets a range, for example a minimum and maximum cover.
Counterparty exposure: Exposure ≈ Current positive mark-to-market value of contracts with that counterparty (plus potential future movement); Only positive value is at risk if the counterparty defaults. Limits are set per counterparty.
Liquidity measure: Cash and committed facilities available ÷ Forecast net outflows over the period; A simple test. Policy sets a minimum headroom. Exclude cash blocked in other countries.

Quick revision

Treasury manages liquidity, funding, foreign exchange risk, interest rate risk and banking relationships.
A cost centre treasury aims to provide service at low cost and does not seek profit.
A profit centre treasury may take positions and earn profit, which brings higher risk and needs strong controls.
Centralisation allows pooling of cash, bigger borrowing deals, lower borrowing costs and consistent risk policy.
Decentralisation gives local managers faster decisions and better knowledge of local markets and regulation.
Transfer pricing can shift profit between countries, but tax authorities may challenge prices that are not at arm's length.
Cash can be repatriated by dividends, royalties, management fees, loan interest and transfer prices, each with its own tax and regulatory limits.
Multilateral netting settles only the net amount owed by or to each group company, which cuts transaction costs and spreads.
Matching offsets receipts and payments in the same currency, which reduces the need to hedge.
Netting may be limited by exchange controls in some countries, so check the scenario for restrictions.
Governance needs a board-approved policy, limits, segregation of duties and regular reporting.
Always finish a discussion answer with a recommendation that fits the scenario.

Common mistakes

Writing a generic list of treasury duties with no link to the scenario. Fix: Quote at least one scenario fact in every paragraph and say what it means for treasury.
Saying treasury should maximise profit by trading currencies. Fix: Say the main aim is risk management and cost control. If profit centre status is proposed, discuss the speculation risk and the controls needed.
Saying a profit centre treasury is better because profit is good. Fix: Always weigh the profit incentive against the speculation risk and say what controls are needed.
Treating all treasury profit as speculation. Fix: Separate profit from services at market rates, such as netting and in-house banking, from profit on open positions.
Listing generic advantages and disadvantages with no link to the scenario. Fix: Tie each point to a fact, such as the number of currencies, countries or subsidiary autonomy in the case.
Saying centralisation is always better. Fix: Consider exchange controls, local regulation, culture and the size of the group. Conclude with a justified view or hybrid.
Treating dividends as tax deductible for the subsidiary. Fix: Remember dividends are paid from after-tax profit. Only deductible payments reduce local taxable profit.
Ignoring withholding tax on royalties, interest or dividends. Fix: List every tax layer in a table: local, withholding, parent. Tick each one off.
Netting amounts in different currencies without converting them Fix: Convert every amount to one currency at the stated rate before you do anything else.
Using the wrong rate, such as the bid when told to use the mid rate Fix: Read the rate instruction first. Note which rate you used beside your table.

Exam tips

Always apply to the scenario. Name the country, currency, subsidiary or cash position the question gives you.
Make a balanced argument. Give a benefit and a limitation for centralisation, hedging or profit centre status.
Link treasury actions to shareholder wealth or the stated strategy to earn professional skills marks.
Write for the stated reader, such as the board, in a clear, structured way with short headings or paragraphs.
Expect this topic to feed into calculation questions on hedging and interest rates, so be ready to explain why a method is chosen as well as compute it.
Link every point to the scenario. A generic list of pros and cons scores poorly in AFM.
Always mention speculation and say how to control it. Examiners expect this in any profit centre answer.
Show professional skills: give a clear recommendation, use a logical structure and write for the board in a persuasive, concise style.