New York, January 31, 2013 – A solution presented this week as an alternative to flawed language in a section of The International Accounting Standards Board’s IFRS 9 amendment on hedge accounting is a win for corporates, but further complicates accounting for foreign exchange hedges, says Reval (www.reval.com), a leading global Software-as-a-Service (SaaS) provider of comprehensive and integrated Treasury and Risk Management (TRM) solutions.
The IASB’s alternative solution applies a fix to the way the IFRS 9 amendment, issued last September, treated the element of currency basis in forward FX pricing, which would have left companies exposed to significant profit and loss volatility and would have created misalignment between their risk management strategies and accounting.
“The downside is that the solution itself will create a layer of complexity when accounting for FX hedges,” says Blaik Wilson, Chairman of Reval’s Hedge Accounting Technical Taskforce. “In short, the IASB achieved the accounting outcome at the expense of simplicity. Clearly what the IASB discovered in replacing the current hedge accounting rules was that aligning the accounting to risk management outcomes was paramount.”
According to Reval, in practical terms, the decision this week means that most companies will elect to designate only the spot risk of their currency hedging. This will minimize P&L volatility in most cases but it increases complexity as both the hedged and excluded components must be monitored separately.
“The cornerstone of this week’s decision was the IASB’s acceptance that currency basis reflects a ‘cost of hedging’ in forward FX pricing, much like premiums that are paid for options,” Wilson explains. “This decision means that the way companies designate and process currency hedges will likely be very different between IFRS 9 and IAS 39. Organisations need to start thinking now about how they will adapt to that change.”
The final standard is expected to be published in the first half of this year, with early adoption available immediately from that point.
Reval is a leading, global Software-as-a-Service (SaaS) provider of comprehensive and integrated Treasury and Risk Management (TRM) solutions. Our cloud-based software and related offerings enable enterprises to better manage cash, liquidity and financial risk, and includes specialized capabilities to account for and report on complex financial instruments and hedging activities. The scope and timeliness of the data and analytics we provide allow chief financial officers, treasurers and finance managers to operate more confidently in an increasingly complex and volatile global business environment. Using Reval, companies can optimize treasury and risk management activities across the enterprise for greater operational efficiency, security, control and compliance. Founded in 1999, Reval is headquartered in New York with regional centers across North America, EMEA and Asia Pacific.
For more information, visit www.reval.com or email firstname.lastname@example.org.
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