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October 2011 Newsletter View in pdf
IFRS 9 Hedge Accounting Update
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.
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.
Announcing New Foreign Currency Software
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 firstname.lastname@example.org or 408-350-8580.
Hedge Trackers Organizational Announcement
By Rebecca Owens
Sandra Koch has recently transitioned into the role as Hedge Trackers’ Director of FX /Commodity Outsourcing and Capella Customer Support. Sandra has been a key member of Hedge Trackers’ team since 2006 as Senior Technical Consultant and as the Senior Technical Manager on the management team since 2008. Sandra also has wide-ranging experience in both foreign currency and commodity risk management, helping clients implement and organize cash flow and balance sheet hedging programs and strategies. While at Hedge Trackers, LLC she worked regularly with clients on documentation, like item and effectiveness testing, as well as derivative accounting setup and support.
Prior to Hedge Trackers, Sandra spent seven years with Tellabs, Inc. as Senior Finance Manager and Business Unit Controller where she designed and managed the FAS 133 compliant hedge program. Sandra is based in the Chicago area.
Janice Oberhofer will be rotating into the role of Hedge Trackers’ Senior Technical Manager where she will be responsible for researching complex derivative accounting issues, provide advanced trainings and support technical efforts, defining additional functionality development for Capella Foreign Currency.
Janice joined Hedge Trackers in 2001 and has served in various roles most recently as Director of FX Software and Outsourcing. Prior to joining Hedge Trackers Janice worked in a variety of corporate treasury roles hedging currency risk at companies such as KLA-Tencor and Tandem Computers.
This rotation is expected to further develop and strengthen the Hedge Trackers Management Team, while providing our clients with a seamless level of ongoing technical support.
EITF: Accounting for CTA
By Lisa Wallace
FASB’s Emerging Issues Task Force Issue No. 11-A, “Parent’s Accounting for the Cumulative Translation Adjustment (CTA) upon the Sale or Transfer of a Group of Assets within a Foreign Subsidiary That Meets the Definition of a Business”, considers conflicting guidance on this issue. Topic 830, Foreign Currency Matters, states that CTA is recognized in earnings only when the foreign subsidiary is completely or substantially liquidated. However, Topic 810, Consolidation, provides that when a group of assets meeting the definition of a business under Topic 805 is sold, that a portion of the CTA associated with that group of assets should be recognized in earnings. This issue is currently on the Agenda for the November 3rd meeting.
By Lisa Wallace
Year-end audit is fast approaching for many companies. In preparing for an audit of your hedge accounting program, keep in mind the following key control areas:
- Have all derivatives, including embedded derivatives, been identified?
- Are all derivatives on balance sheet at fair value?
- Are the values in OCI reconcile-able to future transactions?
- Is the hedge documentation complete and easily accessible?
- Have the effectiveness tests been completed in accordance with the documentation?
- Are the hedged transactions still probable of occurring?
- Have gains and losses been released to income when the hedged item impacted earnings and consistent with documentation?
- Have the necessary disclosures, including tabular and non-tabular requirements, been met? (See ASC 815)
We suggest that you strongly encourage the auditors to begin looking at derivatives and hedge accounting issues early in the audit (preferably at interim). Too often this is an area that is addressed at the very end of the audit when potential issues can easily turn into a last-minute crisis.