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How to Automate Compliance for Hedge Accounting

Special hedge accounting is an elective accounting treatment under U.S. and International accounting principles. An organization must first qualify for special hedge accounting and then follow ongoing compliance requirements to remain qualified.

The risk of non-compliance can lead to shutting down the hedge program or even a restatement of company financials. Therefore, compliance with ASC 815 (or IFRS 9) is of upmost importance when taking special hedge accounting treatment.

Special Hedge Accounting Compliance

Current offerings allow for the easy adoption of ASC 815 (and IFRS 9) special hedge accounting and offer much better compliance and tracking capabilities than previous iterations.

ASC 815 compliant hedge programs are typically managed by several teams — including Treasury, Accounting, FP&A, Local Business Units and the SEC Reporting group. Controls are built into software offerings to reduce compliance and control issues while streamlining processes.

For example, business units can import revenue and expense forecasts into software that recommends trades for Treasury to execute, then passes those trade details to accounting to prepare designation documentation, journal entries, disclosures … and so forth.

Does your hedge accounting solution provide?:

  • Time stamped and audit-tested designation documentation
  • Pre-programmed ASC 815 (IFRS 9) complaint hedge strategies
  • Flexibility to reclassify deferred hedge gains/losses into income by linking with hedged item recognition
  • Effectiveness testing on a qualitative and quantitative basis
  • Exposure-to-disclosure solution for hedge accounting
  • Role based controls for Accounting, Treasury and SEC reporting
  • Fully transparent valuations and valuation methodology
  • Reconciliation of all hedge accounting account balances such as OCI
  • Flexibility when hedges aren’t perfectly effective
  • Back-to-Back trading and designation capability for local accounting & tax purposes

If not, your hedge program and financial statements could be at risk of non-compliance. If your finance team is applying ASC 815 (or IFRS 9) manually or with basic hedge accounting software, they may run the risk of non-compliance.

Understanding Compliance Risks

Even the best processes can break down when manual intervention is required or basic software programs are outmatched by real-world hedge scenarios.

If steps are missed in a process or gaps in controls arise, your entire hedge program can be shut down by the auditors. We often see “3 strikes and you’re out” when it comes to over hedging. Lack of automation can leave companies exposed to lapses in compliance which may be dealt with by the auditors in a similar fashion.

Record material impacts to your financial statements incorrectly and you could face a restatement.

Automating Compliance

Today’s risk management software solutions can provide rock solid automated compliance for hedge accounting and SOX controls.

Designation documentation can be generated based on treasury strategies and accounting’s elections, generating a hedge contract linked to a hedge strategy that meets ASC 815 (or IFRS 9) requirements.

Proper effectiveness tests are included and available each period so that a highly effective hedge relationship can be substantiated. Hedge accounting is pre-programmed based on accounting’s elections so that the hedge results are recorded correctly each period.

Systems today account for and maintain compliance around the imperfect hedge relationship or corner cases. While less robust solutions may be able to handle a simple hedge accounting scenario, they won’t be prepared for changes in the hedge relationship, forecast misses, de-designations, back-to-back trading scenarios and more niche applications of the accounting standard.

All required reports and schedules needed for disclosure reporting are available with detailed reconciliations as soon as the accounting is completed.

CapellaFX is a powerful risk management software solution that can handle automating special hedge accounting compliance. CapellaFX manages the hedge process from forecasted exposure through accounting and disclosures. If managing risk is job one, and you don’t have automated compliance, now you might wish you did.

Say goodbye to compliance risk and hello to cloud-based hedge accounting software that can handle it all. Discover CapellaFX today.

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