October 2011 Newsletter View in pdf

By Christin Kauten

The Hedge Accounting Project is the third phase of IFRS 9: Financial Instruments, a replacement of IAS 39 Financial Instruments: Recognition and Measurement. In August 2011 the IASB provided an update which focused on summarizing the outcome of the re-deliberation process after comments were received on the Exposure Draft (“ED”).

Changes to Exposure Draft

Bifurcation of Risk

Note: Great news, there are no changes from the ED.

Time Value Treatment

Forward Points The ED did not propose any change to accounting for forward points however, in the outreach activities this issue came up repeatedly. As a result it was included in the re-deliberations. It was proposed that for companies that chose to exclude forward points from special hedge accounting treatment they could be recognized into the P&L over time on a rational basis since its value was essentially locked in at the inception of the hedge. Effective spot rate changes would continue to be recognized in OCI as per the original guidance. Like option time value, it appears that the delta between market value and amortized time values may be caught up in OCI.

Option Time Value In response to outreach activities the time value on plain vanilla collars will follow the ED proposed treatments on vanilla puts and calls: time value will be either amortized to income on a rational basis or held and reclassified to income when the hedged item impacts earnings depending on the nature of the hedged item.

Foreign Exchange Hedges

Net Position Hedges The original draft of the ED allowed for hedges of net positions for foreign currency risk when the effects to the P&L, for both parts of the net position, were in the same reporting period. This timing restriction was lifted as a result of feedback during the comment period highlighting that cash inflow transactions and cash outflow transactions even if recorded a the same period could impact earnings in different periods. To offset potential risk of earnings management from this change, additional documentation requirements at inception were added. All forecasted transactions identified as a part of net position must be specified so that the pattern of how they affect P&L is outlined.

Commodity Hedges

Under IAS 39 there is a mandatory “own-use” scope exception for derivative accounting when the underlying is actually used in the company’s business. This exception primarily impacts companies with commodity risk. The original ED proposed that if “own-use” contracts were used by a company to manage its business on a fair value basis and the net exposure is maintained at a position close to zero they should be accounted for as derivatives and measured at fair value. The feedback on this proposed change in the ED was that while it was helpful for some companies it was not helpful for others and could create new exposures. As a result the fair value accounting treatment on “own-use” contracts will be an election rather than a mandate if it eliminates or significantly reduces an accounting mismatch.

Disclosures As a result of feedback concerning commercial sensitivity around the proposed disclosure requirements, revisions were made to focus on the terms and conditions of the hedging instrument rather than amount, timing and uncertainty of future cash flows. All other subject areas of the ED were reconfirmed and we can expect additional clarification and examples to be added shortly.

Remaining Topics and Timeline The topic of hedges of credit risk using credit derivatives has not yet been discussed. The IASB wants to address the issue specifically. The types of disclosures that would be useful for entities that reset hedging relationships frequently or apply a “dynamic” hedging process have not yet been discussed or determined. The transition and effective date are also pending. It is expected, though, that the Board will vote on the ED in either quarter 4 of 2011 or quarter 1 of 2012.

By Helen Kane

Hedge Trackers announces the release of its new hedge accounting software: Capella Foreign Currency. The GAAP-compliant derivative accounting features of AcappellaFX will now be available for integration with your existing treasury systems, trade portals, ERP systems and rate providers. The new design allows users to access the entire feature set from the web: users will be able to login where ever or however they access the internet. In addition, fair value adjustments for credit have been codified along with import capabilities for exposures and trades data. We believe all users will be pleased with the design effort that replaces the old system’s dated look and feel with an exciting and updated interface.

Hedge Trackers has been processing derivative accounting entries for start-ups through Fortune 100 companies on AcappellaFX for almost a decade. When our software was originally licensed to clients the ability to implement it without IT intervention—in other words, without accompaniment—led to its name: AcappellaFX. Our new release, although still available standalone, has been upgraded to facilitate integration with treasury systems, trading portals, rate providers, and ERP systems. We are confident that existing and new clients will find Capella Foreign Currency is the brightest star in your constellation of treasury applications as it delivers GAAP compliant processes and journal entries for your currency hedge program.

Capella Foreign Currency manages the derivative accounting process:

Appropriate, automated designation documentation at trade execution
Measurement of ineffectiveness
Production of US GAAP/IFRS compliant derivate accounting debits and credits in entity functional currency
Preparation of consolidated tables for required quantitative disclosures

Capella Foreign Currency supports treasury’s exposure and trade management requirements as well as accounting’s control and reporting requirements. Capella has become the system of choice for organizations that recognize they need a robust derivative accounting solution providing deep technical support for those occasions when hedging is not perfect: it is the perfect tool in the imperfect world of hedging.

Capella Foreign Currency isn’t just software

Capella is supported by a full team of derivative accountants and senior hedge consultants rather than call center technicians. We understand the urgency of the close cycle; we understand the drive towards efficiency and need for accuracy; and we understand derivative accounting—inside and out. Capella clients are licensing a best in class tool and a team of derivative accounting experts that can support them in their application of derivative accounting.

Capella Foreign Currency will replace AcappellaFX, the cornerstone of Hedge Trackers’ outsourced derivative accounting business since 2004. Our ASP clients will continue accessing the system from subsidiaries around the country and around the globe.

Foreign Currency Outsourcing Clients

Regression results will soon be accessible via a web link provided with your entries. Foreign Currency outsourced clients will be receiving information on how to access this from their derivative accountant.

Introduction to the new system

Hedge Trackers will be holding its first demo of Capella Foreign Currency during the Association for Finance Professionals Annual Conference inBoston, November 6-9. To schedule a demo during or after the conference, contact your derivative accountant or connect with us at info@hedgetrackers.com or 408-350-8580.

October 2011 Newsletter View in pdf

IFRS 9 Hedge Accounting Update

Announcing New Foreign Currency Software

Hedge Trackers Organizational Announcement

EITF: Accounting for CTA

Audit Readiness

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