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IFRS, International Financial Reporting Standards, has a mission of increasing financial statement readability and disclosure requirements. Profit and loss reporting plus risk management strategies play essential roles in both IFRS 7 and IFRS 9 rules.

 derivatives accounting

IFRS 7 applies to properly disclosing financial transactions, for both recognized and non-recognized financial instruments, on the financial statement. Information must allow readers the ability to assess the performance and position of instruments. The entity decides the amount of detail needed to properly comply with the rule, but must take into consideration the risk of overburdening the reader with meaningless details or having relevant details hidden within an aggregate amount.

IFRS 7 requires entities to combine financial instruments into appropriate categories on the financial statement. Instruments are categorized according to disclosure nature and characteristics of the instrument. Having instruments properly classified decreases reader confusion while helping with the reconciliation process.

Properly disclosing risks plays an essential role in providing relevant financial information to users. Risk includes market, interest, foreign exchange, price, credit and financial. IFRS 7 requires entities to perform a sensitivity analysis in order to assess market risk on all aspects of business, but states that entities can perform a different sensitivity analysis on each individual financial instrument. Interest risks arise when financial instruments have interest listed on the balance sheet, but other instruments not being included in the aggregate asset total. Interest for each financial instrument must be reflected at fair market value and any fluctuation explanations given within the financial statement footnotes.

Foreign exchange risks involves financial instruments being denominated in a foreign currency. This IFRS 7 states that the foreign exchange risk does not apply to non-monetary instruments or instruments denominated in the foreign currency.

Entities can disclose price risks involving increases or decreases in prices of raw materials or the market price of equity instruments. Derivatives including interest rate swaps and forward contracts are affected by price risks.

Credit risks involve fair market value fluctuations of the entities financial liabilities. IFRS 7 states that entities need to value the instruments at year-end rates, accumulating all instruments into one aggregate figure. If an alternative method of valuation is used, the entity must disclose it in the financial statement footnotes. A full explanation of variances must also be disclosed in the financial statement footnotes.

If an entity delivers or relinquishes a financial instrument that contains numerous embedded derivatives whose values depend upon each other and the said instrument also contains components of other assets and liabilities, IFRS 7 states that the entity must disclose the involved characteristics in the financial statements.

IFRS 7 states that when derivative contracts including credit derivatives, foreign currency contracts and interest rate swaps reach completion, if the asset has been valued at the fair market rate, the highest credit risks exposure will be equal to the instrument’s carrying amount.

To make financial statements easier to understand to readers, this IFRS rule suggests that entities may want to divide lump sum cash flows into derivative and nonderivative instruments. This would better match cash inflows with outflows and more fully comply with GAAP requirements.

IFRS 9 replaced IAS 39 and must be implemented beginning January 1, 2013. This rule centers on making the measuring and classifying of financial instruments simpler. Specifically, the third phase of IFRS 9 involves hedge accounting, both macro and general.

Current methods of reporting hedge accounts are reconsidered by IFRS 9. This rule requires entities to perform a reconciliation of credit derivatives used in determining and managing an entity’s credit exposure. Full disclosure of the reconciliation between fair value and nominal amount of the derivatives is required.

Thanks to our sister company Resolution for providing us with this post.

Many exporters confuse foreign exchange management with trying to predict where the currency is going. The reality is that no one knows where the currency is heading today, tomorrow, next week or next year. In the current volatile times it has got a whole lot harder, especially for exporters who are not just grappling with the volatility but also with a currency which against most of our trading partners is close to historical highs.

So if you can’t predict where the currency is going what can you do to better manage your exposure to the daily fluctuations in the currency, which are no doubt seriously impacting on most exporters’’ profitability.

There are certain disciplines that any exporting company needs to know about that is dealing in foreign exchange. For many of these companies it has the biggest impact on the profitability of the organisation. How many times have we heard that if the currency goes above 70 cents or 80 cents or 90 cents I am out of business but how many comapnies also know what their true position is.

The first thing you need to know is what are my exposures, what are my expected foreign denominated cashflows that i can forecast with some certainty over the next month, next year or longer if you can accurately forecast out that far. You then need to think seriously about what exchange rate am I profitable and at what level am I not making any money.

Next you need to think about how am I going to cover these future foreign exchange flows. What are the products that i can use and who is going to provide these products to me?

Most are aware of forward foreign exchange contracts which can be used to lock in an exchange rate for a future date. If you aren’t at least using forward foreign exchange contracts then you should be. Converting the funds when they arrive in your bank account is unlikely to be a long term successful strategy (especially in the current environment) and it is also likely you aren’t getting the best exchange rate on conversion from your bank.

If you are still dealing with the local branch of your bank you should talk to your Relationship Manager about dealing directly with the banks fx dealers to ensure you are getting the best pricing possible. Remember you can negotiate both the margin the bank is charging you and the ultimate price the fx dealer is quoting. This is especially important when transacting fx contracts out into the future. If you are dealing with more than one provider then even better as this puts some competitive tension into the pricing.

You might want to also consider fx options. Options are like an insurance premium on your future fx receivables. An option gives you the right, but not the obligation, to transact at an agreed rate. Whilst often deemed to be expensive they should be a consideration as part of your overall fx management. In the current environment with the kiwi having been in an uptrend for some time forward exchange contracts has been the best strategy, however at some stage in the future the kiwi will be in a downtrend and when this is well established options would be a worthwhile consideration.

Banks are the obvious ones to sell you fx and options but there are also numerous reputable fx brokers around who provide good rates and good service. In days gone by the banks have not serviced small to medium sized businesses as well as they could but in recent times this has changed and they are generally very focused on servicing this sector much better.

Consideration should also be given to having some sensible parameters around how much cover is appropriate to have in place given the accuracy of your cashflows, competitive situation and other relevant factors. You may need some outside expertise to provide this and there are a number of independent advisors who will put together an appropriate treasury risk policy.

The last piece in the puzzle is being able to record, report and value your fx transactions. Most still use spreadsheets to do this but we all know the downside of using them. It is a well documented fact that most financial spreadsheets have at least one error in them and the risk of not recording a deal correctly is too big to take for most organisations. More and more Directors of companies are looking to move away from the reliance on spreadsheets where possible as the risks associated with fx are too high to take the risk of missing a deal and the potential cost.

But it isn’t just the risk of using spreadsheets it is also having access to the best possible information to make the best possible decisions. Spreadsheets will tell you where you are now but they won’t tell you where you are heading. It is always important to know what your current position is based on the cover you have in place but what about your total position based on the cover you are still to take. Are you still profitable at this level? Or what happens if the currency goes up another 10%, what does that mean for the profitability of the company? Should you lock in everything now because you can’t live with the currency moving higher?

These systems exist and they are inexpensive, especially if compared to the risk of missing a deal or not knowing what your true position is. Like any business decision, the better the information the better the outcome.

For most exporters fluctuations in the currency is a daily topic of conversation and many are grappling with the historical highs we are currently facing. There is no crystal ball to tell you where the rates are going from here but there are some common sense measures that in the medium to longer term can be put in place to ensure the ongoing viability of your business.

Richard Eaddy – CEO, Hedgebook.

– A related article by NTZE can be found on the NZTE website (http://j.mp/s68o7k)


Well Hedgebook is officially underway. That feels good.

Isn’t it great when a good idea comes to fruition. Heaven knows most of them don’t…And as they say, its often the simple ideas that turn out to the the best ones. Hedgebook certainly fits that mold.

We’re about making it easier for organisations to manage their treasury function.

For those of you who, like me, aren’t an accountant, treasury is a catch-all term for the tasks that combine to “maximise a firm’s liquidity and mitigating its operational, financial and reputational risk”.

More specifically, we help organisations manage their foreign exchange contracts and interest rate swaps to ensure you are able to make sound, timely financial decisions. That sounds a like worthy goal.

For years we’ve all been relying on ‘that spreadsheet’ locked away on someone’s hard drive, never really sure whether it is up to date or whether we are looking at the right version. As Kiwi’s we tend to be a bit “she’ll be right” about things like this. Perhaps we’ve not really thought about it, or perhaps there just hasn’t been a decent alternative.

But as a country of exporters and importers, for whom navigating the stormy waters of currency fluctuations can mean life or death for some businesses it really is time we took this a bit more seriously.

Enter Hedgebook. Finally, an easier and more secure alternative to spreadsheets.

The truth is, we’ve actually been around for a while. At least the stuff under Hedgebook’s bonnet has been. The engine that powers Hedgebook has was developed by some very clever people a few years back and in various incarnations it has been put through its paces by numerous customers around the world.

So why has it taken so long to get Hedgebook to market? That’s where the “cloud” comes in. The cloud is having a profoundly positive impact on businesses in so many ways. In our case it is allowing us to bring “enterprise-level” software to the market at a price that makes it a viable option for all sizes of business. Now the rest of us can afford the powerful tools that large corporates have been using for years.

So here we are. Hedgebook. Treasury management in the cloud. In the small but important world of treasury management it’s a big deal. We’d like to think it’s a game changer.

That’s not to say we are finished. Far from it. Hedgebook is a constant work in progress and we already have big plans for improvement and the first people we will be taking guidance from is our users.

It is going to be an exciting ride.

Richard Penny is the Market Development Director for Hedgebook.

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