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Hedge Trackers’ Solution to Manage Currency and Accounting Risk

The client stopped missing forecasts due to currency movements when Hedge Trackers showed senior management that hedging could mitigate currency risk without increasing accounting risk.

The Background:

Currency movements were wreaking havoc on corporate forecasts communicated to analysts. Management understood that hedging could address the exchange rate volatility being blamed for the misses, but had been intimidated by auditors’ skepticism and a lack of in-house expertise. To move forward, the company needed key technical knowledge transferred to the internal Treasury and Accounting teams. The client identified Hedge Trackers as a partner who had the practical experience to understand their exposures; identify solutions to improve margin predictability; educate stakeholders; help implement the hedge program; and provide technology to support an appropriate control structure.

The Challenge:

The first challenge to hedging that this client faced was that all subsidiary forecasts for foreign entities were submitted to corporate denominated in USD. Further research suggested that many of the forecasts were generated in USD without consideration for currency – and FP&A was not considering currency movements in their forecast.

Another challenge was that the Technical Accounting Director was familiar with ASC 815 in theory, but had not been involved in the practical application of the guidance. One resource had experience in a treasury organization with a program where hedge accounting was always “assumed” to be perfect. Not a scenario management anticipated in this case.

Hedge Trackers’ Solution:

Hedge Trackers helped the entity transition to local currency forecasting, reviewing actuals in the General Ledger and currency conversion history together with growth plans. A process was established to distinguish between currency impacts and forecast misses.

Once forecasts were denominated in local currencies, it became clear that the timing of transactions was erratic and difficult to forecast within the standard hedge timeframe of a month. Hedge Trackers helped the client outline a hedge program that would define hedge-able exposures in a wider time-frame, create the required effectiveness tests and deliver the hedged expenses at the hedge rate into margin. The Hedge Trackers team trained the treasury organization in trading protocols and necessary documentation. They educated the accounting team about the derivative instrument valuations, journal entry preparation and external reporting requirements of derivative accounting. The client presented the program to their auditors and board with Hedge Trackers’ support. CappellaFX derivative accounting software was implemented to provide internal controls for trading; hedge documentation; effectiveness testing; journal entry preparation and external reporting.

Hedge Trackers created a hedge accounting policy detailing the client’s application of the guidance and the ASC 815 elections the company would take to support the Technical Accounting Director. The client was given detailed t-account examples and additional accounting and disclosure related training. Hedge Trackers also back-tested the program in CapellaFX and met with the client’s auditors to vet the strategies and accounting treatment until the impacted teams were satisfied and ready to move forward. Once the program was executed, the Hedge Trackers team provided oversight for the client through several closes.

The Results:

The client no longer misses forecasts to the analysts due to currency exchange rates. The company has developed a solid understanding of the exposures interactions, the hedges and the hedge accounting. Senior Management is pleased with the program’s results and confident in their team.

The client’s Treasury and Accounting teams now have a solid understanding of the exposures and the hedges coupled with a comprehensive tool in CapellaFX, which efficiently: a) manages trades and trade confirmations, b) prepares fair values, effectiveness tests, and accounting for those trades each month end and c) outputs the SEC required quarterly disclosure tables.

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