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Talking Shop: What Did Your Transition Plan to Hedge Accounting Look Like?

By December 10, 2020 No Comments

Member question: “What did your transition plan to hedge accounting look like?

  • “We are planning to adopt hedge accounting in the future. In terms of transitioning a book of hedges to designated hedges, we will close all existing undesignated hedges and put on a new book that is designated at inception.
  • “We are curious how others have put on these new hedges. How long did you take to put on hedges? Did you trade all at once, daily, weekly, etc.? Also, were there any lessons learned from executing your transition plan to hedge accounting?”

Peer answer 1: “We have transitioned five currencies to hedge accounting so far for our cash flow hedging program. We closed out our existing trades and placed the new trades for hedge accounting all at once in the same day.

  • “The project took much longer because we are utilizing a outsourced model for the accounting with Chatham because we did not have the capacity in accounting to bring it all in house, and our IT team had to build the API.
  • “We also implemented a new ERP system for one of the regions so we had to wait for that to be completed before we could launch that currency. But overall, the project has gone really well​.”

Peer answer 2: “If the hedges are identical (i.e., same value date, notional, etc.) as your existing hedges, I think a better approach may be to do a late designation. Basically, any mark-to-market up to the point of designation would remain mark-to-market through earnings, but once designated any future mark would go to other comprehensive income.

  • “The guidance does say designation needs to occur at the ‘inception’ of the hedge, but I have seen inception applied to mean more where you draw the line of capturing mark-to-market in OCI vs. earnings. (Unwinding hedges and entering identical hedges gets you to the same spot, absent the additional transaction cost). May be worth a discussion with your auditor if this is the fact pattern.”
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Justin Jones

Author Justin Jones

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