Transforming Your Treasury Data with Reconcile to Zero (RTZ)

One of the most difficult and frustrating exercises in treasury is understanding and communicating the results of a balance sheet hedge program.

In theory, it’s a simple exercise. But in reality, it can be very challenging to parse out the results into their components. One of the scariest questions a Treasury team can be asked by the CFO is “why do we have an FX gain or loss if we’re hedged?”

The typical answer: “Let me check and get back to you” or “We are looking into it” or “We need more time to review it.”

Does this sound like your experience? Do you wish for a clear break-down of the sources of your FX gains and losses, so you don’t have to waste time breaking down the data yourself and can report to your CFO proactively with confidence and know-how?

We understand this challenge. That’s why we created Reconcile-to-Zero (RTZ) and built it into our CapellaFX technology suite. As part of the CapellaFX suite, RTZ helps treasuries analyze and report on sources of ineffectiveness in a balance sheet hedge program, in essence, explaining why the FX Gain/Loss is not zero.

The reconciliation-to-zero concept has been around for a while, but previously, our experienced consultants had to train treasuries to calculate these amounts manually by entity. In addition to taking more time, the math can be difficult to keep straight given the thousands (or tens of thousands) of foreign currency transactions a company may enter into each period.

RTZ provides the sources of residual gains and losses in a hedged FX gain/loss line. RTZ breaks down foreign currency gains and losses into an attribution report covering nine distinct categories.

CapellaFX RTZ Attribution Categories

• Un-hedged Exposures – FX from amounts too small to hedge or not hedged for other reasons
• Over/Under Hedged – FX related to hedging too little or too much
• Timing: Current Hedges – FX related to mismatches between the accounting and hedge rate
• Timing: Hedges Related to Next Period – Any FX related to next month’s hedge executed the last day of the month
• Forward Points – Time value decay impacts
• Un-hedged Conversions – FX related to cash conversions executed independent of the hedge program
• Credit Impact – FX from credit discounting requirements for derivatives, but not exposures
• Market vs. BSR – In rare instances where auditors don’t accept the corporate BSR as the spot rate on derivatives the FX related slippage between a market rate vs. the balance sheet rate
• Accounting Anomalies – Gains or losses arising from revaluation processes that appear inconsistent with GAAP FX Gain/Loss reporting requirements

RTZ provides tremendous value by automating the reconciliation process, relieving treasuries of data mining and allowing them to immediately begin analyzing results.

In the past, it took a seasoned treasury pro to quantify amounts associated with gain/loss categories, and it could take upwards of a few days to a few weeks depending on activity. Often, companies would stop their analysis once they could explain most of their residual gain/loss — often missing brewing issues.

While that may work okay for the current month, it doesn’t allow you to prepare for or optimize for the following month. Treasuries can become too focused on putting out today’s gain/loss fire instead of trying to proactively manage currency risk for tomorrow. They become static in reactive behavior — a “whack-a-mole” approach, as we like to call it — because the cause this month is not necessarily the cause of the next. You need the entire picture to make the best business decisions.

RTZ raises the competency level of the entire team because the tool handles the complexities associated with calculating all of the attributions. Treasury can now run reports that clearly explain the residual gain/loss in the foreign currency gain/loss line.

Reconcile-to-Zero Features

Feedback Loop

One of the best features of RTZ is that the attribution categories are actionable. Once analyzed, problems identified in a category can be iteratively improved via changes to the hedge program—or the accounting processes.

For example, the system tracks all un-hedged currencies. That means the impact of not hedging certain currencies can be closely monitored with little or no effort. Treasury will see the exposure and/or volatility growing and can hedge that risk away—before it is material.

Another example is the over- or under-hedged category. If Treasury is hedging a forecast, the report will communicate if the forecast was too large or too small, but more importantly, it will provide Treasury the tools to communicate back to the business what the forecast errors are “costing” the company.

FX SOX Control

RTZ is the one tool that can provide a check or control over the Foreign Exchange Gain/Loss line. This is the line in the income statement that has very few, if any, good controls. Why? Because very few accountants or auditors have a good handle on FX in the financial statements.

RTZ predicts the currency gain/loss from balance sheet exposures and calculates foreign exchange from currency conversions. If the accounting is clean in the ERP system, then RTZ’s result and the accounting result should match in magnitude and direction. If the results aren’t close, something’s wrong. It could be a backward rate input or a sign that something’s not well understood or properly captured. This process can identify some of the classic ERP problems in booking FX Gain/Loss.

For example, if an entity did not use the company ISR (perhaps missed a digit while inputting a rate manually) to record a transaction, the gain/loss would not match the gain/loss expected, and accounting can quickly identify and understand or correct the exception.

RTZ: Turn Data Into Actionable Information

RTZ provides an efficient and effective way to communicate and understand sources of residual foreign currency gains and losses in a balance sheet hedge program.

The platform categorizes nine different sources of FX, allowing treasury to see which categories comprise the bulk of the foreign currency gain/loss impact. RTZ categories are actionable, allowing Treasury to improve results by adjusting their hedges for each category.

The product raises the competency of the entire Treasury team and removes the single point of failure risk associated with having a specific expert on the team able to do this. Now, everyone can run reports and analyze the strengths and weaknesses of the balance sheet hedge program—and communicate them clearly.

Lastly, RTZ provides one of the best SOX 404 control points around the gain/loss line, allowing for a double-check of the accounting results.

Get a demo of CapellaFX to learn more about the power of RTZ and how you can truly transform your Treasury team.