June 30 is fast approaching, and we know there’s a lot to stay on top of at this time of year. Dealing with the level of changes and uncertainty in forecasts and operating cash flows over recent months is something most businesses are unlikely to have faced in the past.
Many companies apply hedge accounting to their FX, commodity and interest rate hedges to reduce income statement volatility.
As I alluded to in my recent blog post, hedge accounting programs will likely be affected by drastically changing forecasts as a result of COVID-19, which will be front of mind for audit teams this year-end.
To qualify for hedge accounting treatment, an essential requirement in cash flow hedge accounting is that the forecast must be highly probable.
In each scenario below, I outline the hedge accounting outcome:
Scenario A – The forecast is no longer going to occur.
The hedge no longer qualifies for hedge accounting and any amounts deferred in the cash flow hedge reserve is reclassified to PnL.
Scenario B – The forecast is no longer highly probable, but the cash flows are still expected to occur at some stage.
The hedge no longer qualifies for hedge accounting although any amounts deferred in the cash flow hedge reserve can remain in place until such cash flows take place.
Scenario C – The forecast remains highly probable, but the forecast settlement date has changed.
This one is more subjective. If the revised date is within a reasonable time frame (for example 0-2 months of the original date), then hedge accounting can continue, and there is no need for a discontinuation of the hedge relationship.
If you need to adjust your hedge due to timing, you could pre-deliver or extend the hedge to the revised forecast date using a swap. This can be done at current market rates or historic rate rolls depending on your circumstances, jurisdiction and banking counterpart. The critical point here is knowing exactly where the market rate is as, on large notional sums, this can move the needle considerably!
Having an expert treasury advisor on your team will ensure you obtain the optimal hedging outcome and save shareholder money.
How we can help:
Rochford is the largest treasury advisory house in Australasia, with decades of experience in financial risk management, hedge accounting and currency overlay.
As the end of FY20 approaches, we can support your company with:
- Accounting Standard Advice – providing guidance and advice on changes to accounting standards
- Hedge Accounting – hedge effectiveness testing, documentation, and accounting journals
- Mark-to-Market Valuations – providing, fair values incorporating credit risk adjustments (CVA) on your derivative book (in accordance with IFRS 13)
- Financial Reporting Disclosures – Audit assistance with financial market risk disclosures (in accordance with IFRS 7)
- Audit Support – assistance with audit queries and valuable support for the internal finance and treasury team during the EoFY period.
For all UK enquiries, please contact firstname.lastname@example.org or +44 (0)20 8057 9180.