The HEDGEHOG Method: Your Secret Weapon to Simplifying Hedge Accounting
Are you a CFO or finance professional looking to optimise your hedge accounting function? If so, the HEDGEHOG Method might be the solution you’ve been searching for. This methodology addresses the eight key areas of optimising your hedge accounting programs.
With the financial landscape continuing to evolve, it’s important that you have the resources and solutions in place to effectively manage your hedge accounting programs, minimise risks, and maximise compliance.
In this article, we’ll explore the eight pillars of the HEDGEHOG Method in more detail. If you have any questions about applying this methodology to your business, contact one of our team members today.
1. High-Level Strategy
The first pillar of the HEDGEHOG Method is developing a high-level strategy. This involves aligning your business objectives with your hedge accounting practices to ensure you are effectively managing risk and meeting financial reporting objectives. Take the time to write out your organisation’s strategy, your current procedures, and where changes might be needed.
2. Effective Policy Document
Next, you want to start building your hedge accounting foundation by creating comprehensive policy documents. Here, you will produce a formal Derivative and Hedge Accounting Policy that outlines your organisation’s framework for managing derivatives, hedge relationships, accounting methodologies, and risk assessment procedures. Going forward, this will be your organisation’s go-to resource for any employee or auditor questions.
3. Documenting the Hedge Relationship
Pillar three of the HEDGEHOG Method outlines hedge accounting documentation requirements. Each hedge relationship should have clear and accurate documentation. This not only strengthens internal controls, but also facilitates smooth audit processes and reduces the risk of misinterpretation. Within your hedge policy document, you should have a list of what documentation employees need to compile for each hedge.
4. General Ledger Journals & Valuations
The HEDGEHOG Method also creates policies for maintaining general ledger journals and valuations. Consistency and accuracy are important to maximise hedge effectiveness. General ledger journals related to derivative transactions and independent valuations need to be updated consistently to ensure the fair representation of hedging instruments and build reporting credibility.
5. Effectiveness Testing
The HEDGEHOG Method looks to bolster your hedge accounting compliance, which is why hedge effectiveness testing is another core competency. Under IFRS 9, regular testing to assess the effectiveness of hedge relationships is generally required. The HEDGEHOG Method calls on the need for systemic testing, regular monitoring, and frequent analysis of the hedging instruments and their underlying exposure.
6. Hedge Disclosures
Transparent and informative hedge accounting disclosures are important to give stakeholders a comprehensive understanding of your risk management strategies. These disclosures need to be understandable and accurately describe the nature and impact of hedging activities in the financial statements. The right disclosures foster investor confidence.
7. Optics of the Reported Results
The HEDGEHOG Method outlines strategic techniques and management tactics to optimise hedging activities, improve financial goals, and enhance the stability of your earning profile. The management of the optics of reported results helps your organisation reduce volatility and reach specific financial goals.
8. GAAP & IFRS Compliant
The final pillar of the HEDGEHOG Method is compliance with GAAP and IFRS. By implementing best practices, enhancing internal controls, and minimising the risk of misstatements, the HEDGEHOG Method can reduce audit fees and ensure accuracy in your financial reporting.
Getting started
The HEDGEHOG Method eliminates the complexities associated with hedge management and accounting, helping you streamline your processes, effectively reduce risk, and maximise compliance efforts.
Derivatives and hedging instruments continue to play a vital role in risk management. Now is the perfect opportunity to rework your existing procedures to future-proof your organisation and fully leverage the benefits hedging has to offer.
Reach out to our team today to learn more about how The HEDGEHOG Method can revolutionise your hedge accounting program and drive your organisation towards a brighter financial future.