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Hedge Accounting Trends in Asia Pacific

by Nik Tandy, Head of GAAP Solutions, The Hongkong and Shanghai Banking Corporation

The importance of understanding and managing risk has escalated over the past two years, prompted by the global financial crisis. For companies headquartered in Asia Pacific – or with significant standalone financial operations there – this has created the dual challenges firstly of establishing an appropriate way of measuring and managing risk, and secondly of accounting for hedge transactions in accordance with the relevant accounting standard, particularly the hedge accounting requirements of IFRS, US GAAP or other local equivalents.

While in many respects, these issues are reflected globally, treasury functions in Asia Pacific have typically had fewer resources available, in terms of specialist treasury management systems, compared with those in Europe and the US, with the possible exception of Australia. The use of spreadsheets rather than specialist treasury management systems or modules of ERP systems is commonplace within the region, even amongst large corporates, and there is a heavy reliance on banks for valuation of financial instruments. This article looks at how the issue of identifying, monitoring and accounting for risk has developed in Asia Pacific and how this could change in the future.

Regional variations

Asia Pacific cannot be considered as a cohesive region in any respect, with significant variations in financial culture and complexity. The same applies to treasury and accounting practices. For example, many of our corporate clients are only now introducing  IFRS and the related hedge accounting requirements of IAS 39 – for instance, those in countries such as India (which is adopting IFRS from April 2011) and Malaysia (which adopted the standards in 2010). Companies in these countries typically need support throughout this statutory reporting transition process, from risk identification through to hedging and accounting for hedges. At the other end of the spectrum are more accounting-savvy clients in countries such as Australia. These companies are generally looking for advice on the best way to structure and execute a transaction to minimise accounting risk and maintain hedge effectiveness, or need help in identifying, quantifying and minimising the residual risks. 

Whatever our clients’ level of financial sophistication, our starting point is to understand their business fundamentals, risk appetite and exposures. We are then in a position to help them to understand how market movements could affect their earnings. Depending on market conditions, we highlight certain risks that clients should be looking to hedge, or opportunities that they may look to take advantage of. Based on this, we can then recommend specific hedging products or assist them in restructuring or unwinding existing hedge transactions. Particular attention is paid to the fine-tuning of hedging proposals and execution strategies, as small differences can have a significant impact on the accounting treatment.