Hedge Accounting

Hedge Accounting

Many organizations hedge their exposure to different financial risks (for example interest rate risk, foreign exchange risk, commodity risk, etc.) through the use derivative financial instruments such as Interest Rate Swaps, FX Forwards and Options.

To adhere to American and International accounting standards these must be accounted for using fair value, often causing volatilty in the P&L. To minimise the effect on the P&L many organizations use Hedge Accounting.

Hedgebook performs an important role in this process through the provision of instant fair values (or mark-to-markets), negating the need to manually calculate or rely on a 3rd party for the information.

Watch Hedgebook's Fair Value calculation tools in action in this short video

Hedgebook and Hedge Accounting

In current (IAS39) and prospective (IFRS9) financial instrument accounting practice, derivatives must be accounted for at fair value.  Under American accounting standards, fair value is "the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party."

Hedged items, because of their nature as core to the business, are often accounted for at historic cost. This gives rise to mismatches between the derivative instrument and the underlying exposure.  Under current accounting standards this mismatch must be taken to the profit and loss account.  For many entities this would result in a significant amount of profit and loss volatility arising from the use of derivatives.

An entity can mitigate the profit and loss effect arising from derivatives used for hedging, through an optional part of IAS39/FAS133 relating to hedge accounting. 

Hedgebook offers a range of tools that make the hedge accounting process simpler and less manual.

• Instant Valuations: Our daily rate feeds allow you to generate instant mark-to-market valuations, giving you access to information at your fingertips and ensuring you no longer have to rely on banks for this important data.

• Reports: Generate reports showing up-to-date fair values of your entire portfolio, across all types of instruments.

Are you hedge accounting? Find out first hand how Hedgebook can take the pain out of generating and reporting fair values, by starting a trial today.

Try Hedgebook free for 30 days. Click here to start your trial today!