Hedge Accounting Checklist
Key Functionality
- You can value both the hedge and the item from the same system
- You can maintain dynamic relationships between hedges and their items
– Change over time
– One-to-one, one-to-many, many-to-many
– Partial designations
– De-designations - Your system can capture at-inception and lifecycle events and all the adjustments in between inception and maturity or sale
- Your system can produce documentation of designated hedges that meet regulatory requirements
- You can perform HET in a controlled (i.e. audited) and streamlined way
- Comprehensive testing for CF and FV hedge strategies
– Dollar Offset
– Consistent Critical Terms
– Synthetic Method
– Prospective Regression Testing
– Retrospective Regression Testing
– Short Cut - System has necessary controls to ensure data consistency and auditing capabilities
- You have the ability to report on designations, test results, necessary disclosures and produce the documentation required in the appropriate format
Hedge Accounting Challenges by Team
Aspect
Treasury & Risk Teams
Accounting & Finance Teams
Data Management
Focus on trade capture, valuations, and risk metrics (e.g., sensitivities, exposures). Usually use risk systems or treasury management systems (TMS).
Require consistent, validated data for general ledger postings, amortization schedules, and hedge documentation. Typically use ERP or accounting systems.
Valuation Methods
Often use mark-to-market or model valuations updated frequently.
May use amortized cost or historical cost methods. Differences cause reconciliation issues.
Hedge Documentation
Focus on hedge designation and risk management objectives. Documentation often maintained in treasury or risk systems.
Need to ensure documentation supports accounting rules compliance (IFRS, US GAAP), audit trails, and disclosure requirements.
Timing of Data
Real-time or daily updated risk positions to measure exposures.
Usually periodic (monthly or quarterly) close processes, requiring timely and accurate data from treasury systems.
Process Ownership
Treasury owns trade execution and risk hedging strategy.
Accounting owns financial reporting, compliance, and audit.
System Silos
Treasury and risk systems often specialized, sometimes legacy, with limited interoperability.
Accounting systems focused on compliance, control, and reporting, sometimes with different data models.
