CIMA P3 Syllabus A. Enterprise risk - Risks arising from international operations - Notes ^{2 / 3}

Political risk is the risk that political action will affect the position and value of a company.

It is connected with country risk, the risk associated with undertaking transactions with, or holding assets in, a particular country. 

The following can have an impact on the business:

• Nationalisation

• Sanctions

• Civil war

• Political instability

Cultural risks are also linked with country risks

They relate to a business trading in environments that are different from its home country, and facing differences in customs, laws and languages. 

These may result in differences in the ways of doing business which are difficult to manage, and problems in communication.

Legal risks arise from breaches of legislation, regulations or codes of conduct, and can have very serious consequences for organisations

Risks include financial or other penalties (including ultimately closedown), having to spend money and resources in fighting litigation and loss of reputation. 

Key areas include:

• health and safety

• environmental legislation

• trade descriptions

• consumer protection

• data protection

• employment issues

Economic risk is:

the degree to which the value of the firm’s future cash flows can be influenced in the medium to long term by foreign exchange movements.

Translation risk is:

the risk of change in the financial position of the company due to exchange rate changes which usually arises when financial statements are translated to other than domestic currency.

Transaction risk is:

the risk that a transaction in a foreign currency is recorded at one rate and then settled at a different rate.

Trading and credit risk include:

• Physical risk that goods are lost or stolen in transit

• Credit risk that payment may be defaulted by customers

• Liquidity risk leading to an inability to finance an increased working capital cycle