Hedge Accounting

Hedge accounting helps with the presentation of business performance to senior management and investors, regulators as well as covenant compliance in certain circumstances.

It is particularly relevant for IFRS reporting entities under IAS39/IFRS9 as well as entities that are reporting under the new UK GAAP, FRS102. Removing the impact arising from derivatives fair value volatility from the income statement or the I&E account to the reserves line in the Balance Sheet is a common objective for many public and private companies.

At Centrus, we have the treasury accounting expertise and use the hedge accounting module of TITAN™ to support our clients’ hedge accounting requirements. Our solution simplifies the process and generates all detailed compliance documentation and accounting entries.

Why is hedge accounting a risk management practice?

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on cash flows or the value of assets and liabilities, and, therefore, ultimately affect profit or loss. In order to mitigate these risk exposures, companies often enter into derivative contracts to hedge them. IFRS requires derivatives to be recorded at fair value through profit or loss. Whenever the hedged exposure is measured at amortised cost or is a forecast transaction that is not yet recorded in the financial statements, this would create an accounting mismatch. The idea of hedge accounting is to avoid this mismatch.

We have recently been working with multiple clients that are transitioning to FRS102 and have been helping them during each step of the process:

  • Review of debt and derivatives portfolio
  • Recommend hedge designations
  • Support with drafting of hedge documentation
  • Perform hedge effectiveness testing using different methods
  • Provide accounting entries
  • Explain accounting entries and calculation methodology to senior management and auditors

Centrus Hedge Accounting solution allows easy designation of hedges into cashflow, fair value or net investment hedge relationships and performs the relevant testing. Our experienced team monitors changes in the Standards daily to guarantee compliance at all times.

Our approach

To work closely with our clients and their auditors in order to establish a hedge accounting methodology paper before we proceed with the actual portfolio set up and the associated production of accounting entries. We will always provide the results of our analysis supported with a comprehensive methodology report that include underlying assumptions.

Service Contacts

Jason Murphy

Jason Murphy

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Conor O’Flynn

Conor O’Flynn

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