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A Treasurers' Dilemma How to manage economic and accounting impacts of hedging and funding activities Since the implementation of IFRS, many treasurers have had to increase their focus, and indeed have had their decisions increasingly driven by the accounting for certain transactions. In some cases this has been beneficial, as the accounting has provided increased economic transparency. On the other hand, we have seen a few cases where treasurers have opted for what they felt are less desirable economic alternatives, as they felt the accounting for the more economically sensible options was so misleading that it was not a sensible choice. At RBS, we have recognised the challenges that many of our customers have faced with certain aspects of IFRS in general, and specifically IAS 39. This article provides an overview of some of the more common ways we have assisted treasurers with the impact of IFRS...

A Treasurers’ Dilemma

– How to manage economic and accounting impacts of hedging and funding activities

by Jonathan Chesebrough, Head of Risk & Accounting Advisory at RBS Global Banking and Markets and Colin McKee, Risk & Accounting Advisory, RBS Global Banking and Markets

Since the implementation of IFRS, many treasurers have had to increase their focus, and indeed have had their decisions increasingly driven by the accounting for certain transactions. In some cases this has been beneficial, as the accounting has provided increased economic transparency. On the other hand, we have seen a few cases where treasurers have opted for what they felt are less desirable economic alternatives, as they felt the accounting for the more economically sensible options was so misleading that it was not a sensible choice.

At RBS, we have recognised the challenges that many of our customers have faced with certain aspects of IFRS in general, and specifically IAS 39. As such we have a team of dedicated accounting advisory personnel, who can provide a range of assistance, from understanding how the accounting works for a certain transaction to assistance with structuring certain transactions to achieve the desired accounting result. This article provides an overview of some of the more common ways we have assisted treasurers with the impact of IFRS, including:

  • Compliance with derivative and hedge accounting requirements
  • Restructuring of existing trades
  • Balancing the economic vs. accounting debate
  • Structured funding
  • Managing covenant and rating agency metrics

Compliance with derivative and hedge accounting requirements

One of the key considerations for companies in developing an appropriate hedging strategy has been whether or not the chosen approach will comply with the requirements of IAS 39 and so be eligible for hedge accounting.

We have also been involved with structured funding, ensuring that companies can obtain potentially advantageous funding costs by embedding derivatives in the funding.

At RBS, we have been assisting clients to design suitable hedging strategies in order to meet the requirements of the standard and so achieve the desired accounting result.

The first hurdle which many companies face is how the hedging instrument will ‘fit into’ the hedge accounting models of IAS 39. In many cases, for example, vanilla foreign exchange or interest rate products, this can be relatively straightforward, however some instruments, such as cross currency swaps between two foreign currencies, can require a greater degree of thought.

Preparing adequate hedge documentation and performing hedge effectiveness assessments are issues which many companies struggle with initially, due to a potential lack of familiarity with the pitfalls of IAS 39. In order to address this problem, we have developed a suite of hedge documents which can be tailored according to the client’s specific scenario. We have also developed a web-based tool, the RBS IAS 39 Toolkit, which allows companies to perform hedge effectiveness assessments for a variety of trades. This has been particularly valuable to many of our customers as it assists them in performing what is often seen as the most technical and computationally intensive aspect of achieving hedge accounting.

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