Hedge Trackers consultants visited the FASB July 12th to investigate rumors that intercompany hedging is again at risk in the pending redline version of the exposure draft. We were surprised to learn that the FASB staff believe that abolishing the ability to hedge “intercompany transactions that eliminate in consolidations” is a change in the guidance. (After all, what intercompany transactions don’t eliminate in consolidation?) We took the opportunity to explain that corporations with foreign functional subsidiaries depend on hedging non-functional currency intercompany transactions to protect themselves from the exposure that arises from sourcing in one currency and selling in another. It was clear that they are not focused on the impact that the functional currency election has on a company’s ability to hedge exposures directly. I suggested the only way to reasonably implement this clarification would be to add a functional currency election “holiday”, which intrigued staff members who admitted to numerous petitions over the years for Held-to-Maturity and other holidays—but they’d never had a request for a functional currency holiday. This may in fact be the only way US corporations will be able to protect their margins in the future if hedging of intercompany transactions no longer qualifies for special accounting treatment. For those companies already USD functional around the globe, there will be no negative effect from the intercompany restrictions.
Exacerbating the risk that the language from the 2008 exposure draft will be reinserted is the FASB’s latest estimate that the redline version of Topic 815 won’t be available until “late August”. Note the redline is also expected to excise the intercompany hedging examples that now exists in the guidance.
If you have local currency subsidiaries and hedge intercompany exposures to protect consolidated margin you need to 1) highlight to senior management the impact on your hedge program should intercompany hedging be prohibited, 2) press your auditor firm to lobby against the prohibition BEFORE the redline is issued, 3) raise the concern to your bankers (who frankly are overwhelmed with the potential impact of the financial instrument re-write and not focused on hedge accounting), 4) start drafting a comment letter based on the 2008 exposure draft language as the staff suggested the plan is to re-insert the 2008 language in the redline draft, and 5) encourage your peers to do the same. There are at present over 150 comment letters and not a single letter addresses the changes to hedge accounting.
