Case Studies

Customer
Grant Thornton Australia Ltd and Grant Thornton New Zealand Ltd

Challenge
Independent audit validation for client valuations of financial instruments

Solution
Hedgebook Audit

Outcome
Efficient and cost effective solution for complying with audit process

Who is Grant Thornton?

Grant Thornton is the world’s seventh largest professional services network of independent accounting and consulting firms. Working with the Australian and New Zealand member firms, Grant Thornton provides growth advisory services to mid-size business and public sector entities. Grant Thornton Australia has more than 1,200 people working in offices in Adelaide, Brisbane, Cairns, Melbourne, Perth and Sydney, while Grant Thornton New Zealand has more than 250 people across offices in Auckland, Wellington and Christchurch.

Both firms’ approach is to combine service breadth, depth of expertise and industry insight with an approachable “client first” mindset and a broad commercial perspective. Of the firms’ services, Hedgebook works directly with the audit divisions. As part of a global network of more than 40,000 Grant Thornton people, across over 130 countries, Grant Thornton Australia and New Zealand each have access to global resources and methodologies that enable it to deliver consistently high quality outcomes for owners and key executives of clients.

Independent Validation Of Financial Instrument Valuations

For companies that are using financial instruments such as foreign exchange forwards, options and interest rate swaps, there is a requirement to measure these transactions at fair value. Auditors are required to independently check that these financial instrument valuations are reasonable, as well as understand the inputs that went into calculating these valuations. Many auditors do not have access to the tools required to value these often complex financial instruments. If they do have access to these tools it is often a select few members of the firm who understand them and therefore it can be a very inefficient, expensive and sometimes haphazard approach to this audit checking process.

Recognising many of its clients use derivative financial instruments, Grant Thornton felt that it was important to independently verify financial instrument valuations rather than just relying on bank confirmations as bank confirmations are sometimes materially incorrect (e.g. due to data entry errors). Accordingly, Grant Thornton was looking for a cost effective solution and found that Hedgebook met its needs.

Simple & Intuitive

The complexities around valuing financial instruments can be daunting for those not involved with them on a regular basis. Hedgebook is not only a simple and intuitive system to use but also provides the inputs that make up the valuations to help with understanding how financial instruments work.

Siva Sivanantham at Grant Thornton Australia was impressed with Hedgebook Audit’s ease of use, “Understanding financial instruments can be a challenge in practice but Hedgebook Audit is simple to use and very intuitive and has helped to take away some of that mystique around how these instruments work”.
Hedgebook provides the training and support, which is an important aspect of taking on any new system. A review with Grant Thornton is held every six months to ensure that all parties are happy with the relationship. This is also an opportunity for key staff to suggest any enhancements they would like developed within Hedgebook Audit and provide any other feedback.

Cost Effective & Efficient

All audit firms are looking to gain efficiencies in their processes but at the same time keep costs down. Hedgebook Audit ticks both these boxes. Being a cloud based system, Hedgebook Audit can be accessed from anywhere. The auditor can access Hedgebook Audit whilst carrying out the audit at the clients’ premises, replacing the need to bring the clients’ information back to a central place to be checked.

Equally, Hedgebook Audit is a low cost solution and the cost is often passed on to the client as a disbursement. As Siva Sivanantham said “The cost of Hedgebook Audit is compelling and provides great value but at the same time covers all our needs when it comes to independently valuing financial instruments.”

Summary

Grant Thornton recognised the importance of independently verifying client prepared financial instrument valuations and was looking for a cost effective solution. Hedgebook Audit has been designed with these issues in mind in terms of giving integrity, control and oversight around the process, but at a palatable cost point. Independent valuations of financial instruments are often a small part of the audit and so the value proposition needed to stack up. As Mark Hucklesby said, “Hedgebook Audit has been an excellent addition to our Audit Team’s toolset.”

Case study image Shotover_Jet,_Jet_Boating_the_Shotover_River_Canyons,_Queenstown,_New_Zealand

Customer
Iconic Kiwi exporter, HamiltonJet

Challenge
An easier, safer way to manage FX derivatives

Solution
HedgebookFX

Outcome
Ability to make better hedging decisions

Iconic Innovator and Exporter

HamiltonJet (www.hamiltonjet.com) is an iconic New Zealand company with typically Kiwi-inspired beginnings. The founder, Sir William Hamilton, developed a ‘jet’ boat in the 1950s that could be used to navigate the shallow rivers near his home in New Zealand’s South Island. Sir William’s waterjet propulsion system is now found in over 50,000 water craft around the world, including recreational, search & rescue, military and passenger ferries.

Global Exposure

HamiltonJet’s waterjet system is exported globally, giving rise to foreign exchange exposures that have a material impact on the financial performance of the company. Like many exporters, HamiltonJet enters financial instruments to hedge unwanted foreign exchange volatility, utilising vanilla instruments such as FX Forwards and FX Options to do so.

Simon Boyd, HamiltonJet’s Chief Financial Officer, was becoming frustrated with the inefficiency, inaccuracy and potential data security risks of using Excel spreadsheets to manage FX derivatives, and sought out an alternative. After evaluating a number of potential options, he decided to use Hedgebook’s online solution.

Better Visibility to Optimise Pricing Decisions

The waterjet propulsion market is niche, with a limited number of suppliers (one supplier/competitor is a household name, Rolls Royce). When quoting for new business HamiltonJet’s FX hedging plays a significant role. If outstanding FX contracts are favourable then HamiltonJet can quote a superior price in foreign currency terms without compromising NZD profitability. Hedgebook quickly and clearly shows the amount of hedging in place versus cashflow forecasts, as well as the weighted average exchange rate of the hedging. Knowing his FX position allows Simon to be better informed when setting rates for the purpose of quoting sales.

Understanding Margin Impacts of FX Fluctuations

With any company involved in exporting or importing activity, FX fluctuations can have a material impact on profits. According to Simon, Hedgebook “. . . summarises the data in a more meaningful way. Not only does Hedgebook provide  useful reports on the current position but also allows for “what if” analysis based on higher or lower exchange rates i.e. the impact on profits of unhedged foreign currency cashflows. Such reporting tools allow for deeper conversations when deciding whether to take more cover or not, or what level of compliance versus our policy limits, is desired.”

Board Reporting Clarity

Like most companies, Simon has to report to his Board on a regular basis. Says Simon, “By having relevant, accurate information the Board is fully informed of HamiltonJet’s FX position and can take comfort that this important financial risk is being appropriately managed. Conversations between Board and management on FX related issues can be targeted and focused.”

Stronger Bank Relationships

As CFO, Simon has Board approval to hedge foreign exchange cashflows over multiple years. Committing the company to long-term financial contracts has implications from a bank funding perspective as out-of-the-money contracts can impair the credit appetite of the bank. For Simon, Hedgebook enhances the transparent and open relationship he has with his bank. Simon says, “The visibility over cashflows and hedging that Hedgebook brings to the company, and the ease of sharing this information, means HamiltonJet can form a stronger partnership with the bank; the better they know your business, the more they can help you.”

Administrative Ease

As part of a global exporter Simon’s role takes him out of the country for a number of weeks of the year. As a cloud-based system, Hedgebook is always available. Managing maturing contracts, ensuring cash is available in the correct currency when it is needed, pre-delivering or rolling over contracts, answering Director’s questions, understanding the company’s FX position and making important hedging decisions can all be easily managed while on the road.

Simpler Compliance Reporting

For the most part HamiltonJet reports under the reduced disclosure framework of IFRS so faces somewhat less onerous compliance requirements than some Hedgebook clients. However, Simon Boyd comments that, “To do year-end accounts has become a very easy exercise”. Derivative valuations and sensitivity analysis are designed to keep the auditors happy.

Summary

HamiltonJet is a successful New Zealand exporter and foreign exchange fluctuations impact the company’s financial performance. HamiltonJet recognised that relying on error-prone excel spreadsheets was inadequate. Simon comments, “Relying on Hedgebook to streamline the management of its foreign exchange instruments has helped the company make better hedging decisions due to the representation of the financial information. Hedgebook is more than just a valuation tool, it’s a day-to-day management tool helping engage the Board and the bank in a more meaningful way.”

kathmandu

Customer
International outdoor adventure retailer, Kathmandu

Challenge
Simplifying regulatory reporting and helping merchandisers negotiate with suppliers

Solution
HedgebookPro

Outcome
Streamlined audit process and improved product margins

International Adventure Retailer

Kathmandu has revolutionised the outdoor clothing and equipment market over the last 30 years. By taking advantage of lightweight and quick-dry materials, spending time in the great outdoors has never been more enjoyable or accessible. From one store in Melbourne in 1987, Kathmandu has grown to over 100 across NZ, Australia and the UK.

Foreign Exchange Risks

Kathmandu has a team of merchandisers securing the latest materials and products for their designers and customers. Kathmandu’s FX hedging plays a key role in the negotiations with these suppliers. Chris Kinraid, Group Financial Controller, says, “One of the challenges a retail business such as Kathmandu faces is securing the supply chain. Much of our products and materials are sourced in Asia, paid for in USD and imported into our various markets. Our buyers need to know the exchange rate on which to base negotiations. Hedgebook is a very intuitive and user friendly system for capturing our FX transactions. We know with confidence our FX position which, in turn, allows our procurement team to negotiate with confidence. Reports on our FX exposures versus our future cashflows, both known and forecast, means we have oversight on the P&L implications of fluctuating exchange rates.”

Control and Compliance

Kathmandu recognised the need for a Treasury Management System to manage both the FX and interest rate exposures. Chris comments, “As a publicly listed company it is important that we operate in an environment of control and compliance. A Treasury Management System helps us achieve that goal. We have used other TMSs in the past but Hedgebook gives us all the functionality we need to capture, value and report our treasury exposures and at a fraction of the cost.”

Streamlining the reporting process means Kathmandu can spend less time with the auditors and more time on value-add aspects of the business. Chris says, “We are in an environment of increased regulation and this does not appear to be changing anytime soon. Independent valuations and disclosures such as sensitivity analysis have been a mainstay of financial reporting but we continue to see further requirements. Credit Valuation Adjustments are an example of this. To try and achieve this level of compliance by relying on banks and spreadsheets, when low cost tools like Hedgebook are available, does not make sense.”

Saving Administration Time

There is always the day-to-day administration of FX contracts to manage. In Kathmandu’s case this is across two entities. Maria McGoldrick is Kathmandu’s Banking & FX Manager, “A focus for my role is ensuring cash is appropriately managed. This means cash is available at the right time, in the right currency, in the right place. Kathmandu’s international presence makes this task multi-faceted and relying on error prone spreadsheets is not an option. Hedgebook’s email notifications of maturing transactions is a feature of the system that ensures I do not get any surprise phone calls from the bank about settlements. The Hedgebook system is super easy to use and makes my job easier.”

Naturally, timing of the physical movement of cash may not line up with hedging contracts so there are regular pre-deliveries or rolling over of contracts. Such activity results in adjustments of the contract rate due to the FX forward points. Maria comments, “Hedgebook provides live FX rates, both spot and forward, so when I transact with my banks I have the visibility over the FX market to know the quoted rate is fair and reasonable.”

Better Hedging Decisions

Month-end and management reporting is fundamental to any well run organisation particularly one that has compliance commitments for two stock exchanges. Leveraging technology allows the reporting to be timely and accurate. Reviewing the performance of past FX hedging decisions helps with making better hedging decisions in the future. Chris says, “Hedgebook reports our matured deals and clearly shows the financial impact of our delivered FX contracts when compared against a “no hedging” approach. To not hedge is not a viable approach as we need a degree of certainty around FX rates for the season ahead to give our buyers confidence, but we still want to know the impact from our decisions. Hindsight is a wonderful thing but it is another piece of the FX hedging jigsaw that Hedgebook helps us with.”

Summary

Kathmandu is a publicly listed international retailer with significant foreign exchange exposure. Having clear visibility over FX hedging puts the buyers of materials and products in a stronger position when negotiating with suppliers. Hedgebook provides this visibility in a simple and intuitive way. As a publicly listed company Kathmandu has regulatory compliance requirements regarding financial instrument fair value and disclosures. Hedgebook streamlines this process in a cost effective way.