Implementing derivatives and hedging strategies is only half the battle – you also need to account for them correctly to avoid unexpected earnings volatility. Our Hedge Accounting service assists clients in aligning their risk management programs with accounting standards (such as IFRS or US GAAP hedge accounting rules) so that the economic protection you’ve achieved through hedging is faithfully reflected in your financial statements. Al Banyan Tree’s team – a blend of quantitative analysts and accounting specialists – will review your hedging relationships (e.g. forecasted purchases hedged by commodity futures, or FX cash flows hedged by forwards) and determine the optimal accounting treatment. We help prepare the required documentation for hedge designation, outlining the hedging instrument, the hedged item, the risk being hedged, and how effectiveness will be assessed. This documentation not only keeps you compliant, but also clarifies the intent and mechanics of your hedges to auditors and stakeholders.
A core part of our service is conducting hedge effectiveness testing using advanced statistical methods. We utilize techniques like dollar-offset ratios, regression analysis, and more complex time-series analytics to measure how well the hedge tracks the underlying exposure. If the hedge is highly effective (within the allowable ranges), we ensure you can apply hedge accounting so that mark-to-market fluctuations of the hedge don’t unduly hit the income statement each period. In cases where initial tests show ineffectiveness, we advise on strategy adjustments – such as dedesignating and redesignating hedges, or changing the hedge ratio – to achieve better effectiveness going forward. Al Banyan Tree also stays with you through the reporting cycles: we provide support for preparing hedge accounting journal entries, disclosures, and performing periodic effectiveness re-tests. In essence, we take the complexity out of hedge accounting compliance. The benefit to your company is twofold: financial statements that accurately reflect your risk management intent, and smoother audits/regulatory compliance since your hedging program will meet the rigorous criteria set by accounting standards. With our guidance, you can confidently hedge business risks knowing that your financial reporting will remain transparent and true to your economic reality.
A core part of our service is conducting hedge effectiveness testing using advanced statistical methods. We utilize techniques like dollar-offset ratios, regression analysis, and more complex time-series analytics to measure how well the hedge tracks the underlying exposure. If the hedge is highly effective (within the allowable ranges), we ensure you can apply hedge accounting so that mark-to-market fluctuations of the hedge don’t unduly hit the income statement each period. In cases where initial tests show ineffectiveness, we advise on strategy adjustments – such as dedesignating and redesignating hedges, or changing the hedge ratio – to achieve better effectiveness going forward. Al Banyan Tree also stays with you through the reporting cycles: we provide support for preparing hedge accounting journal entries, disclosures, and performing periodic effectiveness re-tests. In essence, we take the complexity out of hedge accounting compliance. The benefit to your company is twofold: financial statements that accurately reflect your risk management intent, and smoother audits/regulatory compliance since your hedging program will meet the rigorous criteria set by accounting standards. With our guidance, you can confidently hedge business risks knowing that your financial reporting will remain transparent and true to your economic reality.