Understanding Hedge Analytics and Hedge Accounting

Every enterprise's assets and liabilities are exposed to fluctuations in interest rates, exchange rates, or commodity prices. An enterprise will always have natural hedges, but in most cases it is necessary to manage risk proactively by taking a position in a derivatives contract, insurance, and so on. Not entering into such contracts actually increases overall risk.

Derivatives, such as foreign exchange forward and future contracts, options, or currency swaps can reduce deviations from expected earnings, but the enterprise needs to implement risk management systems and procedures to manage those transactions.

Risk Management provides the IAS 39 and FAS 133 Hedge Accounting features to address your organization's economic realities and the regulatory requirements associated with derivative instruments.

FAS 133 provides accounting standards for working with hedge transactions and requires certain compliance elements that provide stakeholders with windows into the workings and financial progress of the enterprise's risk management. Under FAS 133, you use special accounting for hedged transactions, decreasing the income statement volatility otherwise introduced by mark-to-market accounting.

Since PeopleSoft 8.0, Treasury has provided a hedge accounting solution based on FAS 133 guidelines, which focuses on accounting for derivatives and hedging activities. IAS 39 takes a broader view on accounting for financial instruments in general, and extends the areas addressed in FAS 133. There are, however, some differences that have a significant impact on reported performance.

IAS 39 imposes strict regulations on the use of hedge accounting, even for hedges that are economically effective. IAS 39 also imposes requirements for a wide range of instruments, including all derivatives, an enterprise's investments in debt and equity securities, financial assets and liabilities held for trading, and a company's own debt. It also covers short-term instruments such as trade receivables and payables.

Whether an organization complies with FAS 133 or IAS 39 regulations, PeopleSoft provides the ability to review investment and hedging strategies, and implement accounting systems to meet the processes and documentation requirements.