Hedge Accounting, Financial Risk Management & Treasury Advisory

It is well known that companies engage in a wide range of hedging transactions in order to manage financial risks. Fluctuations in the value of functional currency, rapid and often unpredictable changes in the macroeconomic environment, challenges related to reliable budgeting and forecasting, increases in interest and credit risk levels, and sharp movements in the pricing of goods and services are only some of the factors compelling companies to adopt financial risk management instruments and strategies — particularly derivative financial instruments — despite their often significant costs.

However, even when companies believe they have effectively managed their economic risks through financial risk management instruments, the real challenge often begins from an accounting perspective.

Export-oriented companies that appear to have depleted their equity due to foreign exchange losses… Executives who struggle to interpret net profit figures distorted by fair value losses and attribute the issue to errors (!) in the accounting standards… Treasury and risk management professionals who believe they have eliminated interest rate risk, only to be surprised by the impact reflected in the income statement… Board members who assume raw material price risk has been mitigated through commodity futures, yet still see the exposure reflected in financial statements… Executives who manage currency risk through cross-currency swaps but cannot fully understand the persistent foreign exchange losses reported in profit or loss…

The inability to properly reflect economically managed risks in financial statements cannot reasonably be explained by shortcomings in international accounting standards. In reality, the solution to these challenges lies within the principles of Hedge Accounting, which constitute nearly one-third of IFRS 9 – Financial Instruments, one of the most significant international financial reporting standards.

By nature, hedge accounting principles are built upon a highly sophisticated theoretical framework. When implemented correctly, however, they enable companies to present a far more accurate financial reporting position — particularly in terms of equity and profitability. As a result, the challenges described above can largely be eliminated, allowing treasury and risk management professionals to work in much closer alignment with financial reporting teams.

With more than 20 years of experience in this highly specialized field, SaBa accounting and reporting consultants currently provide ongoing hedge accounting advisory services to more than 50 corporate clients.

If the challenges outlined above sound familiar to your organization, we strongly believe that connecting with our team would provide significant value to your business.