Case Study - Pharmaceutical
The enterprise-level pharmaceutical business had a USD dominated top-co located in Singapore, but treasury operations in Australia. The business was experiencing foreign currency volatility in earnings and CFO's aim was to safeguard their USD cash flows and to smooth out reported earnings.
Challenges
The CFO and finance team were inexperienced in running an effective hedge accounting program, which meant they lacked the internal capability to deliver the program without significant cost outlay in systems and people. Moreover, due to the significant size of the business, the forward contracts used to manage the FX risk created material MTM valuations that could distort the true underlying reported financial performance of the business. The treasury entity was an AUD-denominated company, while the top-co was USD-denominated, and the forward contracts were selling USD and buying foreign currency. This created complexity as to whether hedge accounting could be obtained at both individual and consolidated levels.
Our support
Hedge Effective Advisory provided the following services to address the business's challenges: - Produced a position paper to go to a Big Four auditor outlining the hedge accounting strategy and documentation. This provided the auditor with confidence that the hedges would qualify for hedge accounting treatment at both entity and consolidated levels. - Provided managed services to run the hedge accounting program for the finance team, including hedge documentation for every trade, MTM journal entries and reporting, and access to reports and analytics on the client reporting platform. - Provided ongoing advice and support to the business during subsequent audits.
Outcome
With our support the business obtained a clean audit from the Big Four accounting firm. The finance team can now focus on core finance objectives without getting bogged down in the details of hedge accounting. Moreover, all the hedge accounting reports and documentation are available to the client via our proprietary hedge accounting software, Hedgehog.