Describing Hedge Accounting for FX Forward – Group Ledger IFRS (1XD)

The hedge management and hedge accounting process helps you to mitigate profit and loss volatility from the use of derivatives.

Currently, the scope item supports IFRS 9 and covers cash flow hedge using FX forwards (including NDF) as hedging instruments.

The functionality helps you to automate labor-intensive processes, such as calculating net open exposure amount, creating hedging relationship for hedge item and hedge instrument, determining the key figures calculation (NPV, Forward, CCBS, CVA/DVA), performing the valuation of FX transaction, checking classification, dealing with the de-designation and generating posting journal reports.

The scope items provide an overview of net open exposure amount and supports the management of hedge accounting.

Users are able to reduce manual operation, such as hedge relationship mapping, designation and classification. Furthermore they make better operational and strategic decisions using the comprehensive reporting and analysis tools.

In November 2013, IFRS 9 hedge accounting and amendments were published to replace the existing hedge accounting model in IAS 39.

The main elements of the new IFRS 9 hedge accounting cover simplified effectiveness testing, including removal of the 80 – 125 percent highly effective threshold. Also, less profit or loss volatility when using options, forwards and foreign currency swaps is used.

All in all, more items qualify for hedge accounting, for example, pricing components within a non-financial item or net foreign exchange cash positions. Finally, you can more effectively assign hedge account exposures to two risk positions by separate derivatives over different periods.

There are also several topics that have not changed in IFRS 9 compared to IAS 39. For example, the cash flow, fair value, and net investment models are retained. Measuring hedge effectiveness is still required. Also known from IAS 39, the hedge ineffectiveness is still to be reported in profit or loss. Companies are still bound to hedge documentation.

Under the new requirements, in order to qualify for hedge accounting, only prospective hedge effectiveness testing is required.

For simple hedge relationships, entities are expected to be able to apply a qualitative test (for example, critical terms match where the risk, quantity, and timing of the hedged item matches the hedging instrument).

For more complex hedging relationships, a more detailed quantitative test is likely to be required. The new requirements in IFRS 9 may lead to entities having to exercise additional judgment in practice for complex hedges.

Use the Define Hedging Area app to create a new hedging area for your company.

The hedging area is an entity that represents a section of hedging policy of the company. The creation of a hedging area is a necessary requirement to start the process of hedge management and hedge accounting. It is the central steering entity that contains all relevant settings for this process. It is fully versioned and certain changes are only allowed in a new version or a new hedging area.

A company can have multiple hedging areas for hedge accounting according to its hedging policy. However, a hedge-accounting-relevant hedging classification can only be assigned to one hedging area for hedge accounting, therefore creating additional hedging areas requires you to define additional hedging classifications.

The Number of Periods and the Period Length fields define the time buckets that will be shown in the hedge management cockpit for exposure and hedging instrument data.

The Absolute Time Pattern checkbox allows definition of fixed periods. The number of periods in this case starts with the Valid From date of the hedging area version. In the case of a relative time pattern the number of periods starts with the key date of the hedge management cockpit.

The hedging area controls which data (exposures and hedges) are shown and how they are presented in Hedge Management Cockpit.

Hedge Accounting I and Hedge Accounting II control how designation works.

The determination of the exposure item hedged with a non-deliverable instrument, such as a non-deliverable forward, is subject to the Date for Determining Exp.Itm for Non-Del. Inst. field.

Two different attribute values are available:

• Fixing date
• Value date

The default value is the value date.

Depending on this setting in the hedging area, the system searches for the exposure item using the value date or the fixing date. If hedge accounting is active for the hedging area, the hedging relationships are created, and the planned dedesignation date and the dedesignation date of the hedging relationship are set either to the value date or to the fixing date of the hedging instrument.

With this feature, you can influence how exposure items are determined for non-deliverable instruments, such as non-deliverable forwards, that are used as hedging instruments. You can now decide in the hedging area whether the value date or the fixing date of the non-deliverable instrument is used.

Several hedging classifications can be defined to the same hedging area. A hedging classification that is hedge-accounting relevant can only be assigned to exactly one hedging area.

The hedging classification is a mandatory entry for a hedging instrument if it shall be designated automatically.

Hedging Relationship Scenario and Hedge Accounting Rule are entities that are defined by SAP.

• Hedging Relationship Scenario: Describes a specific use case of a hedging relationship.

• Hedge Accounting Rule: Defines how the amounts of hedging reserve and cost of hedging reserve are calculated.

SAP pre-delivers four hedging classifications (YFC00 - YFC07) for hedge accounting in SAP S/4HANA CE 1802.

It is possible to use SSCUI to create additional hedging classifications.

The enhancement for the new type of reclassification depends on the company code and distinguishes the reclassification of hedging reserve and cost of hedging reserve amounts that were classified for the hedging relationship up to and equal to the balance sheet recognition date.

Balance Sheet Recognition ID: 3.

The classification result between the designation date and balance sheet recognition date is frozen until the Deviant Reclassification Date = Due Date of Hedging Instrument + DIO (Days Inventory Outstanding) - Payment Term.

You can use the Process Raw Exposures app to manually create, change, release, and delete raw exposures. Each time you save a raw exposure, a new version is created. Version 000 is always the current version of the raw exposure. In display mode, you can switch between the different versions of the raw exposures. If you select a line item on the Line Items tab, the system displays the related sub raw exposures at the bottom of the screen. You can view the flows created for each sub raw exposure in the Display Exposure Position Flows app.

On the Line Items tab, choose a due date that is in the future and that fits to the definition of the reporting time pattern in the hedging area. Enter the amount and currency (use - for outgoing amounts) to the line item. Besides manually keying in a raw exposure, you can also import raw exposures from a spreadsheet.

Use the Take Snapshot app to take a snapshot of the exposure data belonging to a specific hedging area. For the subsequent process of hedge management and hedge accounting, it is mandatory to rely on fully versioned data. This ensures that at all times an auditor can check which data served as the basis for a hedging decision. Taking a snapshot will link the raw exposures to a hedging area. The link is exclusive, meaning one exposure can be linked only to one hedging area. A snapshot can be used only for hedge management purpose or for both hedge management and hedge accounting purposes (Day Reference should be selected).

The selected incoming or outgoing exposures and the exposure items are saved on the database, and can be reviewed in the Hedge Management Cockpit app.

You can review the following key figures in the Hedge Management Cockpit app by using the predefined layout 1R_ALL_CH: incoming exposures and outgoing exposures. Furthermore, you will find the net exposure, net hedges, hedged rate, and the hedge quota (%).

Different standard layouts are provided. Alternatively, you can define your own layouts.

It is possible to drill down to a more detailed level.

Attributes from the forward transaction are required to determine the exposure item of the relevant exposure snapshot (of a valid hedging area version).

These include, for example, the company code, valuation area, currency or the Put/Pull field.

After entering the hedging classification, the Hedge Accounting checkbox is selected.

When saving the deal, the automated designation is triggered in case an appropriate exposure item can be determined from the snapshot.

Navigation to the hedging relationships is available with the designation after the deal is saved.

With the automated designation, different entities are created automatically to enable hedge accounting processing for exposure items, namely the hedging relationship, hedged item and the hedging instrument.

The hedging relationship status is initially Planned Designation. After releasing designation via the Release Hedging Business Transactions app , the status will change to Designation.

The automated designation of a FX transaction into a hedging relationship is prevented if the calculated balance sheet recognition date is earlier than or on the same date as the designation date (contract date), and the portion of the FX transaction is processed as a freestanding position.

In the Process Hedge Requests app, a released dedesignation request can be withdrawn.

A withdrawn dedesignation request cannot be released again.

If the dedesignation business transaction has been released (which mean that the next step, Process Dedesignation for Hedging Business Transaction, has been executed), the dedesignation request cannot be withdrawn unless you reverse the release of the dedesignation business transaction via the Reverse Release of Hedging Business Transactions app.

The user interface of the Process Spot/Forward Transactions - Collective Processing and Process OTC Options - Collective Processing apps has been enhanced with the new area Termination. It includes the entry fields relevant for termination.

Note

The following general rules apply:

• The termination date is the dedesignation date of the hedging relationship.

  If more than one hedging instruments of a hedging relationship are terminated, the dedesignation occurs on the date of the earliest termination. Because swaps or FX collar options consist of two separate transactions, you must terminate both transactions separately.

• During the release of the termination dedesignation hedging business transaction, if the termination date of the hedging instrument and the dedesignation date of the hedging relationship are equal, the system takes the termination amount as the current market value (NPV_RF) of the hedging instrument during the calculation of the market value components.
• The date of the reclassification hedging business transaction stays unchanged.

Note

Make sure that you have completed all required terminations before you start releasing the Termination Dedesignation hedging business transaction. If you have released the Termination Dedesignation hedging business transaction for a hedging relationship and then want to terminate a hedging instrument for the hedging relationship with an earlier termination date, this is no longer possible. In this case, you would first have to reverse the release of the Termination Dedesignation hedging business transaction.

You can now terminate foreign exchange (FX) transactions early using the Process Spots/Forwards - Collective Processing and the Process OTC Options - Collective Processing apps.

The termination activity is available for the following FX transactions:

• FX forward
• FX option
• Non-deliverable Forward (NDF)
• FX swap (consists of two FX forwards)
• FX collar (consists of two FX options)

You enter the termination-relevant data on the Structure tab of the financial transaction. In the Termination area, you must enter the date of the termination and choose the entry type, such as Amount or Rate.

Dependent on this setting, either you enter the payment amount manually or you enter the agreed termination rate and the system calculates the resulting payment amount. You must also enter the payment date. The flow type 1039 Termination Amount (of flow category 39) is predefined and set by default. After you have entered the relevant data, the payment flow is generated and the posting status of the original buy and purchase flows is set to 0.

When you save the termination activity, the system creates a Termination OTC Transaction business transaction. The termination business transaction consists of the following flows:

• Close flow of the OTC transaction at termination date to clear the nominals
• Termination amount flow (representing the termination flow of the financial transaction)

The date of both flows is the payment date entered in the Termination area of the financial transaction.

If the terminated FX transaction is used as the hedging instrument in hedging relationships, the termination of the FX transactions results in the immediate complete dedesignation of these hedging relationships at the termination date (hedging business transaction Termination Dedesignation). Complete dedesignation means that all hedging instruments that are designated for the hedging relationship concerned are dedesignated.

During release of the dedesignation, if the termination date of the hedging instrument and the dedesignation date of the hedging relationship are the same, the system takes the termination amount as the current market value (NPV_RF) of the hedging instrument during the calculation of the market value components. The date of the Reclassification hedging business transaction remains unchanged. If more than one hedging instrument of a hedging relationship is terminated, the dedesignation occurs on the date of the earliest termination. Since swaps or FX collar options consist of two separate transactions, you must terminate both transactions separately.

The data in the Cash Flow Analyzer app is not currently updated once a termination has been performed.

Using the app Calculate Net Present Values – with CVA and DVA, you can calculate NPVs for transactions with positions in parallel valuation areas. The net present values are calculated by the price calculator and saved in the NPV table. These values can then be applied in parallel valuation. You can also calculate the net present values including credit and debit value adjustments for individual financial transactions. From an integration point of view, the results of the calculation are stored in the NPV table at the level of the financial transactions, and you can display the results using the Enter Net Present Values app.

The hedge accounting key figures are calculated as 100 percent of FX transaction and hypothetical derivative. Components of hedge accounting relevant key figures include Spot, Forward, CCBS and others.

You use the Run Valuation app to perform a key date valuation for the selected valuation-area dependent treasury positions. After setting the selection criteria and valuation parameters, the system values the selected positions and posts the corresponding valuation flows. When you perform a key date valuation, the system sets an internal block to prevent operational business transactions that affect position amounts from being created before the valuation key date when the valuation has not been reversed previously.

At the balance sheet recognition date, you run the Release Hedging Business Transactions app.

The Release Hedging Business Transactions app also updates the amounts of reclassification update types and fixes scheduled reclassification updated types.

Two options are provided for the reclassification of balance sheet crossover. These options are maintained in the Balance Sheet Recognition field in the Designation Splitting sub-area on the Hedge Accounting I tab of the hedging area:

• 1 – Immediate Reclassification at Balance Sheet Recognition Date.

• 2 – Reclassification at the End Date of the Exposure Subitem: the classification result between designation date and balance sheet recognition date is frozen until the end date of the exposure subitem.

This step is only necessary when you do balance sheet crossover. That means you entered the value 1 or 2 in the Balance Sheet Recognition field in the Designation Splitting sub-area on the Hedge Accounting I tab of the hedging area, and you can see the Bal.Sheet Rec.Date on the Hedging Relationship Detail tab of the hedging relationship as described in the Automatic Designation (Planned) step.

The transfer of position amounts from designated to free-standing subposition or the amount update of reclassification update types is executed by the app at the maturity date.

The reclassification of the hedging reserve and cost of hedging reserve position amounts is executed at the end date of the exposure subitem within the derived business transaction framework: the Post Derived Business Transactions app for the fixation and posting of derived business transactions selects the exposure subitem position flows to be reclassified.

Postings are created for reclassification of hedging reserve and cost of hedging reserve position amounts; P/L ineffective position amounts are fixed only.

This step creates postings only when the relevant split ID on the Hedge Accounting I tab of the hedging area uses the following parameters for the Balance Sheet Recognition field:

• 0 or blank – None. The accumulated hedging reserve and cost of hedging reserve between designation date and de-designation date are reclassified at the end date of exposure subitem.

• 2 – Reclassification at the end date of the exposure subitem. The accumulated hedging reserve and cost of hedging reserve between designation date and balance sheet recognition date are reclassified at the end date of exposure subitem.

If 1 (immediate reclassification at balance sheet recognition date) is given for the Balance Sheet Recognition field, reclassification has been done at the balance sheet recognition date by using app Release Hedging Business Transactions.

Select the Manage Your Solution to navigate to the Configuration screen.

The task Configure Your Solution will give you the possibility to maintain certain processes.

The hedging classification is an entity that is used in hedge management and accounting.

If the hedging classification is active for hedge accounting, this information is relevant for the automated designation process. Using the data from the financial transaction including the hedging classification, the system can identify the relevant hedging area version and the relevant exposure item so the hedged item, hedging instrument, hedging relationship and the planned designation flows can be created according to your settings for the hedging area.

This process helps you to mitigate profit and loss volatility from the use of derivatives. Currently, the scope item supports local GAAP and covers Cash Flow Hedge using FX Forwards (including NDF) as hedging instruments.

The functionality helps you to automate labor-intensive processes, such as calculating net open exposure amount, creating hedging relationships for hedge items and hedge instruments, determining the key figures calculation (NPV, Spot, Forward), performing the valuation of FX transaction, checking classification, dealing with the dedesignation, and generating posting journal reports.

You use the valuation function to evaluate the positions of FX transactions based on the previously calculated NPVs, and transfer results to financial accounting. All together you will be enabled to make better operational and strategic decisions using the comprehensive reporting and analysis tools of SAP S/4HANA Cloud.

The key process flows that are covered within this scope item range from the definition of the hedging area based on hedging policy to the upload and release of forecast and planning data.

The scope item helps you to determine the net open exposure in order to make hedging decision. From here execute FX transactions, prepare the designation of those and finally prepare and release designation, determine NPV, execute valuation and classification at period end.

Use the Define Hedging Area app  to create a new hedging area for your company. 

The hedging area is an entity that represents a section of hedging policy of the company. The creation of a Hedging Area is a necessary requirement to start the process of Hedge Management and Hedge Accounting. It is the central steering entity that contains all relevant settings for this process. It is fully versioned and certain changes are only allowed in a new version or a new hedging area.​

A company can have multiple Hedging Areas for Hedge Accounting according to its hedging policy. However, a hedge accounting relevant Hedging Classification can only be assigned to one Hedging Area for Hedge Accounting, therefore creating additional Hedging Area means the necessity of defining additional Hedging Classifications. 

The Hedging Area controls how data is presented in Hedge Management Cockpit and also how snapshots for exposure data are taken.

For Hedge Accounting Processing the Risk Free Currency is set to Local Currency.

The Reporting Time Pattern defines the number of periods and the period length of the time buckets that will be shown in the Hedge Management Cockpit for exposure and hedging instrument data.

The Target Quota defines key figure determination in the Hedge Management Cockpit.

The definition of the hedging area consists of several steps in the SAP S/4HANA Cloud system. The definition of the tabs Hedge Accounting I and Hedge Accounting II is of importance to the overall process.

In the Hedge Accounting I tab, the following are defined:

• Designation Level
• Per Company Code and Valuation Area it is defined at which level it shall be designated.
• The activation of splitting opens another table which influences the attributes of the Hedging Relationships (for example, due date of hypothetical derivative, OCI reclassification date, off/on balance crossover).
• Designation Activation
• Hedge Accounting can be activated per Company Code, Valuation Area and Currency. If activated the automated designation process is switched on.

In the Hedge Accounting II tab the following are defined:

• The Designation Type controls how instruments are treated during designation.
• The Hedging Profile is a central customizing entity of Hedge Accounting for Positions which holds information about how to process Hedging Relationships.
• With the creation of a hedging relationship the Market Data Set is included in the generated test plan and defines what market data is used for effectiveness testing.

Use the Take Snapshot app to take a snapshot of the exposure data belonging to a specific hedging area.​

For the subsequent process of Hedge Management and Hedge Accounting, it is mandatory to rely on fully versioned data. This ensures that at all times an auditor can check which data served as the basis for a hedging decision. Taking a snapshot will link the Raw exposures to a Hedging Area. The link is exclusive, meaning one exposure can be linked only to one hedging area.​

A snapshot can be used only for Hedge Management purpose or for both Hedge Management and Hedge Accounting purpose (Day Reference should be selected)​.

The selected incoming or outgoing exposures and the exposure items are saved on the database, and can be reviewed in Hedge Management Cockpit app.

Subsequently, use the Create FX Spot / Forward Fiori app to create your needed financial transactions. Use the General Valuation Class 45 - Derivatives Cash Flow Hedge and the Hedging Classification YFC08 - FX Risk, Spot, Forward.

Use the Release Hedging Business Transaction Fiori app to perform the designation for your FX Forward transaction. The status of your Hedging Relationship in app Manage Hedging Relationship will change from 05 - Designation planned to 03 - Designated.

Check the Hedge Accounting Key Figures and the Market Value Decomposition using the Calculate Net Present Value - with CVA and DVA app.

From an integration point of view the results of the calculation are stored in the NPV table at the level of the financial transactions, and you can display the results using the Enter Net Present Values app.

You use the Run Valuation app to perform a key date valuation for the selected valuation area dependent treasury positions.

After setting the selection criteria and valuation parameters the system values the selected positions and posts the corresponding valuation flows.

When you perform a key date valuation, the system sets an internal block to prevent operational business transactions that affect position amounts from being created before the valuation key date when the valuation has not been reversed previously.

If you use the Run Classification app, the following Hedge Accounting postings are performed:

• Postings are done on Exposure Subitem level for the designated portion of the FX Transaction based on calculated key figures at period end
• Hedging Reserve according to actual value
• Cost of Hedging Reserve according to actual value
• Amortization of forward points
• P/Lineffective
• The Financial Accounting Document Header is populated with Hedging Relationship, Exposure Item and Exposure Subitem

In order to handle the Contract Maturity you want to generate the payment requests for mature transactions. The process chain in the system would be following to perform this:

1. Use the Post Flows app to taking into account the generated OTC transactions.
2. Perform the Automatic Payment Transactions for Payment Requests step to perform the payment run and the creation of the payment request.
3. Take the Process Business Transactions app.
4. Check the realized profit and loss for the transactions. In this case there is no profit or loss.

When you dedesignate the Hedging relationship, SAP S/4HANA Cloud will calculate the following Hedge accounting data with the latest market data value:-Hedging Reserve according to actual value:

• Cost of Hedging Reserve according to actual value

• Amortization of forward points

• P/Lineffective