While derivative accounting is anything but simple, there are just a few simple controls required to assure completeness and accuracy.
First, ensure that you have accounted for all outstanding derivatives. Second, make sure those derivatives are on your balance sheet at fair value. Finally, be sure you have recorded the correct OCI associated with those derivatives. Strong controls in these key risk areas ensure that other derivative values are correctly impacting income. (Additional controls around income statement geography may be advisable).
To help you get comfortable with the OCI balance we recommend you perform an OCI roll forward each month. This will help ensure derivative related values weren’t erroneously posted into or removed from OCI.
This is also a great way to validate known OCI activity. To roll forward start with the prior period ending OCI balance, reverse the prior month OCI entry on open contracts (assumes reversing entries for open contracts) add impact in current period to OCI for open, closed in current period and closed in prior period contracts. The result should tie to your reported ending OCIbalance related to derivatives.
An OCI roll forward is also one of the required quantitative derivative
disclosures mandated by ASC815. The disclosure tracks additions (debits or credits) to OCI and subsequent reclassifications to the effective account. Monthly reconciling of OCI will facilitate this quarter end disclosure preparation.
For clients using AcappellaFX, there is an Accounting Report conveniently named Disclosure-OCI Ending Balance which can be very helpful in troubleshooting any variances you may find in the reconciliation process. This report can also be used as a support for your G/L balance. This report is available to outsourcing clients upon request.