Case Study - Property Development Group
The property development group is involved in developing and selling residential and commercial properties, property investments, and hospitality operations in key locations across the Asia-Pacific region. As the business requires significant capital to operate, it exposes the company to increased levels of interest payable on their debt facility. To mitigate this risk, the business uses an interest rate cap option.
Challenges
Firstly, the finance team was unsure if this hedging instrument was eligible for hedge accounting treatment. Secondly, the notional amount of the hedge was significant, which meant the MTM movements would be material and hit the profit or loss account if measured at fair value through the profit or loss account. Also, the business did not have an internal system to fair value the hedging instrument.
Our support
Hedge Effective Advisory provided the following services:
Assessed the eligibility of the hedging instrument in accordance with AASB 9
Provided hedge documentation for the hedging instrument - Provided guidance and examples of the required accounting entries and reporting
Outcome
With our help, the company obtained a clean audit and could apply hedge accounting with confidence.