Over the period since the introduction of AASB 139 in Australia (and FAS 133 in the US and IAS 39 everywhere else) one of the more profitable areas of business for the accounting profession has been helping clients achieve hedge accounting. This, for anything other than plain vanilla forwards or other such hedges is a difficult process, typically involving extensive modelling by high priced resources. Big tip – in most cases you should not do it.
Seriously. For fair value hedges, rather than going through the headache of trying to get the documentation and modelling right – just fair value the underlying assets. Both then go through the P&L and match off. This gives you the effect, without the headache.
The case for cash flow hedging is a little trickier, but, unless there is a real reason to do it (head office telling you that you will do it is the only one I can think of) it is easier, cheaper and has the same (long run) effect if you do not do it.
The only effect it has is on the reported P&L for the current year – and this is a purely artificial effect. If the users of your accounts are even slightly financially literate (or do not really care) you can explain it to them in the accounts. Something along the lines of “the reported variations in the P&L relating to derivatives are due to hedging activity and we have a policy not to hedge account. The effect of that policy on reported profit has been to reduce/increase the reported revenue (or expenses) by $XXX. This is a purely artificial impact that will unwind when the underlying deals settle.”
You will need to sort out the exact wording of that statement with your auditors but, seriously, working that statement out and discussing it with the shareholders will be a lot easier and quicker than working through hedge accounting. A heck of a lot cheaper, too.
2 comments
26 March, 2008 at 13:49
Hatmel
This does not make sense to us. Thanks
26 March, 2008 at 18:34
Andrew
No problem – but if you want some help to understand it it may be a good idea to let me know where the problem is.