Hedge Accounting

[tanjm]

Once again. My bugbear is not whether hedging is good or not. Or even whether we should leave it to the management to decide. My bugbear is on potentially misleading information being presented.

[weijian]

Once again. My bugbear is not whether hedging is good or not. Or even whether we should leave it to the management to decide. My bugbear is on potentially misleading information being presented.

thanks for clarifying. Sounds like more like an accounting concern, rather investing practices thing, that u r concerned about.

[tanjm]

Once again. My bugbear is not whether hedging is good or not. Or even whether we should leave it to the management to decide. My bugbear is on potentially misleading information being presented.

thanks for clarifying. Sounds like more like an accounting concern, rather investing practices thing, that u r concerned about.

Huh? This is not a mere accounting concern. If I told you (for example) that my NAV policy is based on own opinion of goodwill, or if I left out my off balance sheet obligation, or if I inflated the value of a project by using 2 year ago oil prices, would you not be concerned?

[specuvestor]

I don't think all hedges need to be declared or presented. Else banks' AR would be bloated. But to qualify as hedge accounting IIRC has to be very specific and it cannot be deliberately over hedged or under hedged, else auditors will not allow it to be accounted as hedge.

[wee]

But to qualify as hedge accounting IIRC has to be very specific and it cannot be deliberately over hedged or under hedged, else auditors will not allow it to be accounted as hedge.

My understanding is the same. Its not that easy (or perhaps its cumbersome or deemed unnecessary)  to qualify for hedge accounting. My experience is at times management might say a risk is hedged, which in essence might be largely true, but the accounting treatment is not as such.

[Clement]

I think there is some confusion regarding accounting for hedges in the general sense and hedge accounting in the financial reporting sense.

A company can hedge risks using derivatives and not apply hedge accounting. In such a case, the hedging instrument (normally a derivative) will just be recorded as a financial asset/liability and have the fair values adjusted through the income statements. Hedge accounting is mainly applied to reduce the impact of the re-measurement of fair values of hedging instruments on a company's P&L. It is intended to address situations such as hedged assets held at amortized cost while the hedging instruments are held at fair value through P&L or, probable forecast transactions not yet taken place while the corresponding hedging instruments are accruing fair value changes through P&L.

Applying hedge accounting comes with rather strict requirements on prospective and retrospective effectiveness testing, documentation and disclosure. It is not surprising that many companies do not wish to apply hedge accounting to their hedging transactions.

[tanjm]

I think there is some confusion regarding accounting for hedges in the general sense and hedge accounting in the financial reporting sense.

A company can hedge risks using derivatives and not apply hedge accounting. In such a case, the hedging instrument (normally a derivative) will just be recorded as a financial asset/liability and have the fair values adjusted through the income statements. Hedge accounting is mainly applied to reduce the impact of the re-measurement of fair values of hedging instruments on a company's P&L. It is intended to address situations such as hedged assets held at amortized cost while the hedging instruments are held at fair value through P&L or, probable forecast transactions not yet taken place while the corresponding hedging instruments are accruing fair value changes through P&L.

Applying hedge accounting comes with rather strict requirements on prospective and retrospective effectiveness testing, documentation and disclosure. It is not surprising that many companies do not wish to apply hedge accounting to their hedging transactions.

Thanks very much for clarifying  this. Looks like I was loosely using the words "Hedge Accounting", when what I really meant was non transparency in reporting if hedges cover the risk or not.

Let me be slightly clearer without actually mentioning names.

The entity I'm looking at says it hedges Interest Rate exposures. Interest rate expense is significant. A rise in the fixing rate by 1-2% has a material impact.

For the IR hedge, they state the notional swapped, but NOT the expiry. In quantitative finance terms, this is useless. They also clearly mention that the hedges are "Cashflow hedges", so hedge accounting does apply, but i'm not interested in the accounting minutiae, only the risk. Since they do not state the expiry of the hedge, but only that the debt is hedged, one would naturally assume that it is hedge for the entire length of the loan.

But it is not. Because I attended the AGM and I clearly heard the finance guy mention the expiries verbally. Then when I questioned him on it, he smugly said, "Well we refinance regularly, and our last refinance,  we got an even better deal". Basically, he is saying that the partial hedge only because they expect to refinance (at a better rate). Whether they refinance at a better rate is beside the point for me (as an aside, if you hedge a floating rate, you are only hedging the libor part of it - so it is mistaken to say that you can hedge partially because you expect to refinance - as long as you refinance at a floating rate, the hedge will still apply. The "better" rate will be on the spread).

The point is that a reasonable investor would assume that they have fully hedged a significant risk and make decisions accordingly. Now, I'm not saying that this is a killer for me - I'm still invested - because I also expect interest rates will not rise as much as some might think. But it is misleading. Now the attitude of the spokesperson and his casual dropping of the expiry leads me to think he thinks there is nothing wrong with what they are doing. Hence my question.

[donmihaihai]

Hi Tanjm

Like your question and asked around too. None reply. I am Not better as well. Thought about it and think it is not about accounting. Clement comment is pretty much what I understand from hedge accounting.nothing much to add.

The only thing will be the intention of going into a hedge and what consider as fully hedge and presentation in accounting.

If the intention is to hedge 3 yrs out of 5 yrs and it is fully hedged within that 3 yrs. I reckon it will be accounted as fully hedge in the financials.
If the instruments used need to re hedge yearly, it will still considered as fully hedge.

As for disclosure, the requirement to disclosures is there but simple one. Pretty much play to the hand of the management(knowingly or unknowingly) and auditor to catch. Auditor generally go with the management

[Boon]

You may find this useful................
________________________________________________________________________________________________________________________
USER PERSPECTIVES ON FINANCIAL INSTRUMENT RISK DISCLOSURES UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS 
Derivatives and Hedging Activities Disclosures (Volume 2)
January 2013 
By CFA Institute
https://www.cfainstitute.org/ethics/docu...r_ifrs.pdf
________________________________________________________________________________________________________________________

[tanjm]

You may find this useful................
________________________________________________________________________________________________________________________
USER PERSPECTIVES ON FINANCIAL INSTRUMENT RISK DISCLOSURES UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS 
Derivatives and Hedging Activities Disclosures (Volume 2)
January 2013 
By CFA Institute
https://www.cfainstitute.org/ethics/docu...r_ifrs.pdf
________________________________________________________________________________________________________________________

Thanks very much. Reading through the overview section of the report, it looks like I'm not alone in my concern. And.... that the practice of non transparency in risk disclosure is widespread by implication.

Now the question is, what force does the recommendation of the CFA institute have?