Abstract

The aim of this paper is to examine the influence of foreign exchange risks on manufacturing activities (monozukuri in Japanese) and the function of derivatives as a countermeasure against such risk from the viewpoint of management accounting. From this perspective, we examine the Comprehensive Profit Opportunity and Lost Opportunity Control (COLC) model, discussed previously in this journal, and further its practical development and application. To this end, this paper first clarifies the actual situations of major Japanese manufacturing companies in terms of foreign exchange fluctuation earnings and derivative instruments (including hedge accounting). Then, after investigation of the prior research on the interrelation between risk management and management accounting, we theoretically analyze the relations between risks, derivatives, and hedge accounting from the synthetic viewpoint of profit opportunity, risk, and opportunity cost. As a result, this analysis can play an important role in outlining the landscape in which business strategy and enterprise risk management align, both proactively and reflectively, with contemporary management accounting.

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