Hedge Accounting for FX Swap supporting IFRS 9 Overview
This 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, and using FX Swap as to transfer hedging instruments from the original exposure period to a new exposure period if an overhedge situation occurs in the original exposure period.
Hedge Accounting for FX Swap supporting IFRS 9 Process
The main process flows covered by the Hedge Accounting for FX Swap supporting IFRS 9 include the definition of hedging areas based on the hedging policy. The scope item supports the upload and release of forecast and planning data as well as the determination of net open exposure to make hedging decisions.
You will be able to execute FX transactions and to prepare and release designation. Further functionality includes the determination of Net Present Value, execute valuation, and classification at period end plus the de-designation and reclassification at contract close and the according postings.
As a result you will be able to reduce manual operation, such as hedge relationship mapping, designation and classification and make better operational and strategic decisions using the comprehensive reporting and analysis tools.
This section covers the Hedge Management and Hedge Accounting process for forecast cashflows in foreign currencies according to a company's hedging policy, and the hedging instruments are FX forward contracts, and near and far legs in FX swap transactions.
The treasury department is responsible for executing a given hedging policy for hedging the risk of forecast cashflows in foreign currencies of future periods. The forecast itself is represented as exposures in the Hedge Management Cockpit. A snapshot is taken for the forecast exposures from Exposure Management. Based on the snapshot, net open exposure amount, risk currency and period are detailed in the Hedge Management Cockpit. Based on rules of the hedging policy, the net open exposures are reduced by trading financial instruments such as a FX forward transaction. In case of expected inflows of a risk currency, the resulting exposure shall be closed by a FX forward that sells the inflow currency and buys the local currency of the company code; in case of expected outflows, a FX forward transaction is traded that buys the outflow currency and sells the local currency.
With the creating of the FX forward transaction, the financial transaction is automatically designated into a hedging relationship as a hedging instrument together with the exposure item of the Hedge Management Cockpit as hedged item. The matching exposure item is determined based on characteristics of the hedging instrument, for example, hedging classification, position currency of financial transaction, maturity of financial transaction. At the same time, the hypothetical derivative is created and all mathematical evaluations necessary for the measurement of ineffectiveness are performed and stored.
At period end, the determination of NPVs, including the decomposition of market values for the hedging instrument and the hypothetical derivative is performed, and the key date valuation of the FX forward transactions is executed. Meanwhile the measurement and postings of the Hedging Reserve (OCI I), Cost of Hedging Reserve (OCI II) and ineffectiveness are executed on the exposure subItem level. The period end close can be executed using two different procedures: valuation and classification with reset or without reset.
With the transfer of forecast cashflow from one exposure period to another exposure period, an overhedge situation occurs for the original exposure period. A FX swap transaction is created based on the information of a swap request to transfer the hedging instrument from the original exposure period to the new exposure period. As a result, the overhedge situation is solved with a FX swap transaction which is processed in the following period end close.
At the balance sheet recognition date, the reclassification flows are automatically created; depending on the rule that was set in the Hedging Area Definition, the reclassification flows are posted immediately or at the exposure subitem end date.
With the maturity of the FX forward transaction, the cumulated hedging reserve and cost of hedging reserve amounts are classified as frozen. At the end date of the exposure subitem, the cumulated hedging reserve and cost of hedging reserve amounts are to be reclassified to profit or loss as a reclassification adjustment.