Driving force or impediment to economically meaningful risk management?
Results of a PricewaterhouseCoopers study in collaboration with the Justus-Liebig-University at Giessen
The regulations governing the accounting of economic securing measures – so-called hedge accounting – are some of the most contested provisions of the International Financial Reporting Standards (IFRS). Practice-relevant literature repeatedly brands them as lacking practical relevance and as being overrated. It is feared that the securing strategies used by companies, cannot be illustrated by the provisions of IAS 39. However, in the absence of hedge accounting, the securing of financial risks with the aid of derivative finance instruments normally leads to high volatility of the accounting results.
This conflict is the starting point of the PwC study “Hedging of Financial Risks and Hedge Accounting in accordance with IAS 39,” which investigates the securing strategy of companies, particularly against the background of accounting disclosure. The object of the investigation consists of the replies of 117 stock exchange listed industrial and trading companies in Germany and Switzerland which were interviewed regarding their hedging activities.
Priority given to the Currency Risk
Of the three financial risks examined - currency, interest and commodity price risks - the currency risk assumes on average the greatest importance for the interviewed companies. 62% of companies attribute to this risk considerable or extreme importance. Interest risks are considered on average to be the second most important financial risks to which companies are exposed and commodity price fluctuation is considered the risk of least importance, but the assessment also showed that these results are dependent on the type of companies’ activities.
The majority of interviewed companies (91.5%) use derivative finance instruments in order to control risk. In currency and interest management particularly, the use of derivatives is wide-spread. The primary objects aimed at by hedging are the reduction of the volatility of accounting results and cash volatility respectively. In the majority of companies, the financial risk management discloses a high degree of centralisation, i.e. decision making, as well as subsequent hedging frequently taking place by involving the Group Head-Office. The majority of companies make use of table calculation programmes for this purpose, and only about every third company uses fully integrated systems with automated interfaces to the accounts.