At what point should a business implement a hedge accounting program?
Here are six of the most common opportunities:
1. Upcoming M&A
A major deal could trigger the need for hedge accounting due to increased exposure, for example, foreign exchange risk with expansion into an overseas market.
2. Changes to accounting standards
This opportunity can sometimes be overlooked. AASB 139 complexity has driven some companies to avoid hedge accounting, but the new standard AASB 9 has simplified the approach. Some companies have been proactive and early adopted AASB 9 to take advantage of these changes.
3. Business valuation requirements
The most theoretically sound method to value a business is to use future expected cash-flows and to discount them back into today’s value. The difficulty arises in trying to estimate these future cash-flows. Hedge accounting will assist in reducing the volatility of these cash-flows and more aid accurate forecasting.
4. Financial covenant reporting
Hedge accounting assists businesses to achieve their financial metrics requirements, throughout the term of the loan. For example, the borrower might be required to always have a certain amount in Interest Cover. Hedge accounting can protect the EBIT number from adverse movements.
5. Systems and technology
Capital expenditure in a new treasury management system (TMS), with powerful hedge accounting functionality, could remove the pain of manual hedge accounting and effectiveness testing.
6. The need to outsource
With many companies going through finance transformation projects, some treasury accounting functions are being outsourced to achieve cost efficiencies. Outsourcing hedge accounting to a third party and trusted professional, can cost a fraction of the cost of an FTE and help to meet cost-saving targets.
Learn more about Rochford Hedge Accounting solutions here >>