3 Common Hedge Accounting Documentation Mistakes & How to Avoid Them
Proper hedge accounting documentation is not only suggested as best practice, it’s required under IFRS 9. The inability to abide by the proper hedge accounting standards can leave your business with disallowed hedges, an unclean audit opinion, and increased risks.
As CFOs and managers, the burden of compliance falls on you, making it important to ensure each hedge has the proper documentation. In this article, we’ll cover the three common hedge accounting documentation mistakes finance teams make and how you can avoid them.
Mistake #1: Not Preparing the Hedge Relationship Form
The hedge relationship form is a document that outlines the hedge relationship and is required under IFRS 9. The omission of hedge accounting documentation is not taken lightly by auditors.
For example, let’s say you have a new risk being hedged and you forget to prepare the hedge relationship form. If the hedge has a loss, the auditor might conclude that you cherry-picked the contract for hedge accounting purposes to avoid reporting a loss position at year-end.
CFOs and upper management have a corporate responsibility to ensure all hedge accounting documentation is properly prepared to validate the hedge accounting relationship. After each new hedge is taken out, be sure you confirm that the hedge relationship form is on file.
Mistake #2: Unrealistic Hedge Relationship Forms
Just like omitting a hedge relationship form can result in serious issues under IFRS 9, so can unrealistic forms. Unrealistic hedge forms are usually the result of communication breakdowns and missed signoffs.
Let’s say that your business opened a new hedge position. Everything appeared correct on the surface, with the proper initial signoffs. However, upon conducting hedge effectiveness testing, the actions in practice did not align with the documentation’s declarations.
To avoid this common mistake, it’s important to conduct effectiveness testing regularly. In addition, enlisting an independent reviewer can be beneficial to ensure the hedge relationship form reflects actual activities.
Mistake #3: Neglecting to Update Records After Hedge Effectiveness Testing
Part of creating a compliant and efficient hedge accounting system is frequent hedge effectiveness testing. One of the common mistakes CFOs and upper management make is neglecting to update hedge relationship forms and other documents after testing is complete.
Your hedge relationship form should have a clear timeline for when testing will be performed. If you do not have supporting documentation and results from testing to support the information laid out in the hedge relationship form, you could run into trouble.
To avoid this error, have a robust document tracking system. For example, if you use a local network, have a folder for each hedge. Regularly verify that each folder is up to date and contains the necessary hedge accounting documentation. Also, set reminders for the dates outlined in your hedge relationship form.
Summary
Has your team made one of these mistakes before? Trying to completely eliminate errors is unrealistic. Therefore, uncovering and correcting errors in a timely manner will be a crucial component to maximising compliance.
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