If your company processes a significant volume of transactions in foreign currencies, you’re likely to use financial derivatives like forward contracts to hedge your FX risk.
Although these products – when executed at the right time – can protect your margins against adverse exchange rate movements, they may also generate challenges at an accounting level.
Documentation – a document must be produced for each hedged item and hedging instrument to prove the hedge relationship is eligible for Hedge Accounting
Effectiveness testing – this type of testing requires complex modelling which demonstrates the effectiveness of the hedge relationship between the hedged item and the hedging instrument. The effectiveness testing computes the correct data (both the effective and ineffective parts) for the accounting entries.
Market data – in order to apply hedge accounting, companies need access to market data from different sources which is costly, and an administrative burden on the accounting department.
Currency Hedger’s Hedge Accounting solution solves key hedge accounting challenges by generating the documentation and performing the effectiveness testing.
Currency Hedger captures rich hedging data from your business using our automated Dynamic Hedging solution. Based on this data, our Hedge Accounting solution links the hedged items with their respective hedging instruments and creates the necessary documentation.
The software then conducts prospective and retrospective effectiveness tests according to the dollar offset method. On each reporting date, Currency Hedger provides the data for the hedge accounting inputs required for the general ledger. This way, the financial statements better reflect your company’s true economic performance.
Minimise P&L volatility
By addressing the timings mismatch associated with standard derivative accounting, hedge accounting removes temporary volatility from the P&L
Impact on enterprise value
By reducing earnings volatility, which is negatively perceived by investors, the company’s statements better reflect its performance.
Having good predictability in future earnings is a positive factor in creditworthiness.
Clearer risk management
Financial statements reflect a more accurate picture of how FX risk is being managed.
Compensation tied to performance and forecasting accuracy can incur unintended impacts from earnings volatility.