Case Study - Logistics
A Singaporean-based shipbuilder financed the business through debt and hedging the interest rate risk with interest rate swaps. The accounting volatility on the substantial hedge book was a concern, and the hedges were undertaken by a treasury entity within the group.
Challenges
The finance team was tasked with implementing a compliant hedge accounting program at both the consolidated and individual reporting entity levels for a business that had not previously operated such a program. The debt was held at an SPV level, while the hedging instruments were managed by the treasury entity. Due to the size of the business, the interest rate swaps used for managing the debt were significant, leading to material MTM valuations that distorted the true underlying financial performance of the company. Additionally, the existing hedges had a Day-1 fair value at the inception of the hedge accounting program.
Our support
Hedge Effective Advisory provided the following services:
Produced a position paper for the auditor, outlining the hedge accounting strategy and documentation. This gave the auditor confidence that the hedges would qualify for hedge accounting treatment at both the entity and consolidated levels.
Created a book of internal hedges between the treasury entity and the SPVs to offset the interest paid on the debt held in the SPVs.
Delivered managed services to run the hedge accounting program for the finance team, which included:
Hedge documentation for every trade
MTM journal entries and reporting
Access to reports and analytics through a client reporting platform
Provided ongoing advice and support to the business during subsequent audits.
Outcome
With our help:
A complex scenario was successfully navigated to achieve the optimal accounting outcome for the Shipbuilder.
The business secured a clean audit from a Big-Four accounting firm.
The finance team can now focus on core finance objectives without getting bogged down in the details of hedge accounting.