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HedgeManagement|GopaKumarS

GopaKumarS
MyBlogtoshareinformation

HedgeManagement
PostedonMarch10,2011

BelowItrytoexplainthebasicprinciplesinHedgeAccountingandtheprocessinSAP.PleasenotethatHedge
AccountingandFinancialInstrumentsunderIFRSareundergoingchangesincludingreplacementofIAS39and
changestoHedgeAccountingandDisclosurerequirements.Hence,thiswriteupmaybereadinthiscontext.For
furtherinformationonthechangesandthetimetableforimplementationofthesechanges,pleaselookupthe
IASBwebsite.TheworkplanforIFRScanbefoundatthefollowinglinkIFRSWorkPlan
WhyHedge?
Hedgingiscarriedoutnormallytomitigateafinancialriskposition(interestraterisk,currencyrisk,equitypricerisk,Commoditypricerisk)ofanentitybyuseof
acounteringtransaction,usuallyaderivative
Forexample,theriskoffluctuationsinexchangeratesofaforeigncurrencysalesordermaybecounteredbyenteringintoaforwardsellforeigncurrency
contractwhichwilloffsettheriskduetoexchangeratefluctuationwhenCashisfinallyreceivedfromtheCustomer

AccountingGuidelines
PriortoAccountingGuidelinesonDerivatives

Derivativeswereoffbalancesheetitems
Hence,earningsriskfornonhedgingderivativesandnoteffectivelyhedgingderivativeswerenotmeasuredleadingtoenormousSurpriseFactor
FAS133intheUSandIAS39underIFRS(InternationalFinancialReportingStandards)specifiestheguidelinesconcerningderivativeinstrumentsandhedging

activities
ThisrequiresallDerivativestobeaccountedintheBalanceSheet
Specialhedgeaccountingallowedifcriterialikeeffectivenessaremet

Differences
#

IAS39IFRS
Principlebasedlooksattheeconomicsofthetransactionthanthe

form
Requireshedgedforecaststobehighlyprobableandprovidesdetailed

guidance

FAS133USGAAP

Formbased
Requireshedgedforecaststobeprobableandprovideslittleguidance.
ThismayresultinsomeprobablehedgesunderFAS133notbeing
allowedunderIAS39

CriticalTermsMatchallowedforprospectiveeffectivenessbutnot

CriticalTermsMatchallowedforbothprospectiveeffectivenessand

forretrospectiveeffectiveness

retrospectiveeffectiveness

ShortcutMethodallowedforprospectiveeffectivenessbutnotfor

ShortcutMethodallowedforbothprospectiveeffectivenessand

retrospectiveeffectiveness

retrospectiveeffectiveness

BasisAdjustmentallowedforCashFlowHedges

NoBasisAdjustmentallowedforCashFlowHedges

HedgingallowedintheGroupcompany

RequiresentitywiththeFXexposuretodothehedging

HedgeItem
CanbeanAsset,Liability,FirmCommitment,ahighlyprobableforecasttransactionoranetinvestmentinaforeignoperation
TheHedgeItemmustexposetheentitytoriskofchangesinfairvalueorfuturecashflowsthatcouldaffecttheincomestatement,currentlyorinfutureperiods

FAS133/IAS39setsoutrestrictionsonwhatmaybedesignatedasahedgeditem
ExamplesofHedgeItem:

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Receivables,Payables,Borrowings&Investments(Foreigncurrencyrisk)
FirmCommitments(SalesOrders,PurchaseOrders)inaforeigncurrency(Foreigncurrencyrisk)

Highlyprobableforecastsalesorpurchasesinaforeigncurrency(Foreigncurrencyrisk)
Highlyprobableforecastpurchaseorsaleofcommodities(commoditypricerisk)
Availableforsaleequityinstruments(equitypricerisk)
Loansandreceivables(interestraterisk)
Fixedorfloatingrateborrowings(interestraterisk)

HedgeInstrument
CanbeeitherDerivativesorNonderivatives
MostderivativescanbedesignatedashedgingInstruments
Awrittenoptioncannotbedesignatedasahedginginstrument.Howeverapurchasedoptioncanbedesignatedasahedginginstrument
Aderivativeneednotbedesignatedasahedginginstrumentatthetimeitwasfirstenteredinto.However,designatingaderivativeotherthanatitsinception
maygiverisetosomeineffectiveness.
Anonderivativeinstrumentcanbedesignatedashedginginstrumentsonlyforforeigncurrencyrisk
Forexample,aforeigncurrencyborrowingmaybedesignatedasahedgeofthecurrencyriskofanetinvestmentinaforeignentity
Anentitysownequityinstrumentsarenotfinancialsassetsorfinancialliabilitiesandthereforecannotbedesignatedashedginginstruments

WhyHedgeAccounting?
UnderFAS133/IAS39allDerivativesarecarriedatFairValuewithgainsandlossesaccountedintheIncomeStatement.
TheseDerivativesmaybeusedtohedge:
AssetsandLiabilitiesthataremeasured:
>atcost
>amortizedcosts
>oratfairvaluewiththegains/lossesonthemrecognizedintheEquity
ForecastedTransactionorFirmCommitmentnotrecognizedinthefinancialstatementatall
ThiscreatesamismatchinthetimingoftheimpactoftheGain/LossintheIncomeStatement:
astherecognitionofthegain/lossofthederivativeintheIncomeStatementmightbeinadifferentreportingperiodascomparedtothe
recognitioninIncomeStatementofthegain/lossoftheHedgedItem
ThismismatchwillcreatevolatilitiesintheIncomeStatement
HedgeAccountingtriestoavoidthisvolatilitybychangingthetimingoftherecognitionofthegain/lossintheIncomeStatementofeithertheHedgeditemorthe
HedgingInstrument
Thatis,torecognizethegain/lossonthehedginginstrumentinthesameperiodastheoffsettinggain/lossesinthehedgeditem

HedgeCategories
FairValueHedge
CashFlowHedge
HedgeofNetInvestmentinaForeignOperation

HedgeCategories:FairValueHedge
isahedgeoftheriskofchangesinthefairvaluethatisattributabletoaparticularriskandwhichcouldaffecttheIncomestatement,associatedwithafairvalue
changein:
arecognizedasset,liability
oranunrecognizedfirmcommitment(egSalesOrder,PurchaseOrder),
oranidentifiedportionoftheabove
HedgeofFirmcommitmentsaretreatedasfairvaluehedges
However,thehedgeofaforeigncurrencyriskofafirmcommitmentcanbetreatedaseitheracashflowhedgeorafairvaluehedge.
AccountingTreatment

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>HedgingInstrument:thegainorlossonremeasuringthehedginginstrumentatfairvalueisrecognizedintheIncomeStatement
>HedgedItem:thegainorlossonremeasuringthehedgeditemattributabletothehedgedriskshallalsoberecognizedintheIncome
statement
Inthecaseofhedgeofanunrecognizedfirmcommitment(hedgedItem),thesubsequentcumulativechangeinthefairvalueofthefirm
commitmentattributabletothehedgedriskisrecognizedasanassetorliabilitywiththecorrespondinggainorlossrecognizedintheIncome
Statement

HedgeCategories:CashFlowHedge
isahedgeofthevariabilityincashflowsthatisattributabletoaparticularriskthatcouldaffecttheIncomestatementandassociatedwith
>arecognizedassetorliability(suchasallorsomefutureinterestpaymentsonvariableratedebt),
>anunrecognizedfirmcommitment(Currencyriskonly)
>orahighlyprobableforecasttransaction
HedgeofforecastedfutureforeigncurrencysalesofinventoryorforecastedpurchaseofInventoryorEquipmentusingforeigncurrencyforwardcontractcan
qualifyforCashFlowHedgeAccounting
AccountingTreatment
>HedgingInstrument:Theportionofthegainorlossonremeasuringthehedginginstrumentthatisattributabletothehedgedriskand
determinedtobeaneffectivehedgeisrecognizedinothercomprehensiveincome(OCI).Theineffectiveportionofthegainorlossis
immediatelyrecognizedintheIncomeStatement
>HedgedItem:noadjustmentsofthehedgeditemisrecorded
>OCIbalanceisreclassifiedashedgeditemaffectsearnings

HedgeCategories:HedgeofNetInvestmentinaForeignOperation
isthehedgeoftheamountofthereportingentitysinterestinthenetassetsinaForeignoperation(FunctionalCurrencyisdifferent)includinganyrecognized
goodwill
Theseincludemonetaryitemslikelongtermreceivablesorloansbutdonotincludetradereceivablesortradepayables
Thehedginginstrumentneedstobedenominatedinthefunctionalcurrencyoftheforeignoperationtobeeffective
AccountingTreatment
>HedgingInstrument:Theportionofthegainorlossonremeasuringthehedginginstrumentthatisattributabletothehedgedriskand
determinedtobeaneffectivehedgeisrecognizedinothercomprehensiveincome(OCI).Theineffectiveportionofthegainorlossis
immediatelyrecognizedintheIncomeStatement
>HedgedItem:noadjustmentsofthehedgeditemisrecorded
>OCIbalanceisreclassifiedashedgeditemaffectsearnings

Example1DifferingAccountingTreatment

TypeofHedge

Itemsubjectto

NormalAccountingTreatment

differentaccounting

AccountingTreatmentwhen
HedgeAccountingisapplied
AsperIAS39whenHedgeAccountingis
applied,thefairvaluechanges(inthis
example,thecurrencyrisk)aretakentothe
Incomestatement(andnotdeferredinequity)
tooffsetthefairvaluechangesofthe

FairValueHedge

HedgeItemCurrencyRisk

AsperIAS39allfuturechangesinthefair

ofanEquityInstrumentheld

valueofafinancialassetheldasAvailablefor

underthecategory

Salearedeferredinequityuntiltheinstrument

AvailableforSale

issoldorimpaired

derivativewhichisthehedginginstrument
(fairvaluechangesinthederivativeisalso
takentotheIncomestatement)
WhenHedgeAccountingis
discontinuedprospectively,theprevious
entriesarenotreversedbutthechangesin

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thefairvalueoftheHedgeitemsubsequentto
thediscontinuanceofthehedgingrelationship
isdeferredinequity.

Example2DifferingAccountingTreatment
TypeofHedge

Itemsubjecttodifferent

NormalAccountingTreatment

accounting

isapplied

HedgingInstrumenta
forwardcontract(Derivative)
CashFlowHedge

usedtohedgethecurrency
riskofahighlyprobable
forecastedpurchaseofraw

AccountingTreatmentwhenHedgeAccounting

AsperIAS39allfuturechangesinthefairvalue
oftheDerivativeshouldberecognizedinthe
IncomeStatementexceptforthoseinstruments
whicharedesignatedaspartofaqualifying
hedgingrelationship.

materialsinforeigncurrency.

WhenHedgeAccountingisapplicable,thefair
valuechangesinthederivativeisdeferredin
equityunderOtherComprehensiveIncome
andreclassifiedintotheIncomestatement
whentheeffectsoftheHedgeitemaffectthe
IncomeStatement.

WhendoesHedgeRelationshipend?
Thevariouseventswhichcantriggeranendtoahedgingrelationshipare:
>ThehedgingInstrument(eg:Foreigncurrencyforwardcontract)hasreacheditsduedateorhasbeenexercised
>Thehedgeditem(exposureforeg:salesorder)nolongerexitsduetoitssales,settlementorcancellation
>Inthecaseofahedgeofaforecastedtransaction(eg:forecastedsales),theforecastedtransactionisnolongerhighlyprobable
>Thehedgefailsaprospectiveeffectivenesstest
>Thehedgefailsaretrospectiveeffectivenesstest
>Thehedgingrelationshipismanuallydissolvedbythemanagement

CriteriatobemettoqualifyforHedgeAccounting
ThequalifyingHedgingInstrument(Eg:aforwardcontractForeignCurrencycontract)isformallydesignatedasanoffsettochangesineithertheFairvalueor
theCashFlowsofaHedgedItem(ExposuresaySalesOrder)
ThehedgeRelationshipshouldbeeffectivebothatinceptionandthroughoutthelifeoftheHedgingRelationship
Themethodusedfortheeffectivenesstest(EgCriticalTermsComparison,DollarOffsetMethod,RegressionAnalysis)shouldbestatedandthelogsofeachof
thecalculationsdocumented
FormaldetailedDocumentationontheHedgeincludingidentificationandtheriskmanagementobjective,detailsofthehedgeitem,thehedgeinstrument,the
natureofriskbeinghedgedandhowtheeffectivenessofthehedgewillbeassessedshouldbemaintainedforeachHedgeRelationship

Whathappensifcriteriaisnotmetsubsequently?
Ifanyofthecriteriaisnotmet,thenHedgeAccountingneedstobediscontinuedprospectively
AnyamountslyinginEquityneedstobereclassifiedtoP/L
ThehedgingInstrumentisaccountedasaHeldforTradinginstrumentwithchangesinvaluereportedintheIncomeStatement

EffectivenessTestingFundamentals
Theeffectivenessofahedgingrelationshipisameasureofhowwelladerivativeprotectsagainsttheunderlyingrisk(exposure)
Effectivenessismeasuredthroughtheeffectivenessratio.Thisratiohastofallwithinacertainrange(80%to125%)inorderforthehedgingrelationshiptobe
consideredhighlyeffective
Aneffectivenesstesthastobecarriedoutateverybalancesheetdate,andatleastevery3months

KindsofEffectivenessTests
Therearetwokindsofeffectivenesstests:
>Prospective(testswhetherthehedgingrelationshipislikelytobeeffectiveinthefuture)

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>Retrospective(testswhetherthehedgerelationshipwaseffectiveinthepast)

WhatcausesHedgeineffectiveness?
Hedgeineffectivenesscanbecausedbydifferentfactorsincluding:
>Whenthehedgeditemandthehedgingtransactionareindifferentcurrencies
>Wherethefairvalueofthehedginginstrumentisnotequaltozeroatinception
>Wherethehedgeditemandthehedgingtransactionhavedifferentmaturities
>Incaseofhedgeofcommodities,pricesfromdifferentcommoditymarketsareusedforthehedgeditemandthehedginginstrument

Presentationintheincomestatementofgainsandlossesfromderivatives

Thestandardsarenotprescriptiveaboutwheregainsandlossesfromderivativesshouldbeshownintheincome
statement.However,theydosetoutsomeguidingprinciples.IAS1describesthelineitemsrequiredto
beincluded,asaminimum,onthefaceoftheincomestatement.Additionallineitemsmaybepresentedto
complywithotherstandardsortopresentfairlyanentitysfinancialperformance.Theincomestatement
presentationofgainsandlossesfromhedginginstrumentsshouldbeconsistentwiththeentitysrisk
managementstrategyandaccountingpolicies.Bestpracticeisthat:
>Gainsandlossesfromdesignatedandeffectivehedginginstrumentsarepresentedinthesame
lineitemasthegainsandlossesfromhedgeditems.Ineffectivenessispresentedseparately,for
example,inotheroperatingincomeandexpense.
>Gainsandlossesonderivativesheldfortrading(includingbothderivativesthatarenot
designatedashedginginstrumentsandthosethatdonotqualifyforhedgeaccounting,for
examplebecausetheyfailaneffectivenesstest)arenotpresentedaspartoftheentitysrevenue,
costofsalesorspecificoperatingexpenses.Theyareusuallypresentedeitherinaseparateline
itemintheincomestatement(ifsignificant)orwithinotheroperatingincomeandexpense.
HedgeAccountinginSAP
ProcessoverviewinSAP
TheHedgerelatedactivitiesinSAPcanberoughlyclassifiedintothefollowingareas:
ExposureManagement
InExposureManagement,theexposuresarecreatedeithermanuallycreatedorautomaticallycreatedfromtheotherareaslikeMaterialsManagementorSales&
Distribution(eg:SalesOrdersandPurchaseordersinforeigncurrency)oruploadedfromexcelworksheets(eg:forecastedsalesdetails).Thesearethenanalyzed
bytheuserswithregardtothedecisiontohedgeandthentransferredtoHedgeManagement.
HedgeManagement
InHedgeManagement,theHedgeItemsarecreatedfromtheexposurestransferredfromexposuremanagement(exposurescanalsobecreatedmanuallyin
hedgemanagementalso,butuseofexposuremanagementisrecommendedasitgivesaveryrobustsolutionforexposuremanagement).Hedgerelationship
betweenthederivativeandtheHedgeitemsarecreatedhereandthehedgestrategyidentified.Thedetaileddocumentationrequiredismaintainedhere.The
Hedgeeffectivenesstestsaredonehere.Theaccountingofdistributionofchangeinderivativesonkeydatesbasedontheeffectivenessassessmentisdonehere
(i.e.distributionofeffective,ineffective,freestandingparts).Theaccountingondissolutionofcashflowhedges(eg:reclassificationofamountslyinginOCItoP&L)
isalsodonehere.AllaccountingentriesarepostedinGLautomaticallybythesystem.
TransactionManagement
InTransactionManagement,theForeignExchangeForwardContracts/Derivativesarecreated,settledandaccounted.Accountingincludesthevaluationofthe
derivativeonkeydatesandtheaccountingofcashflowsandtherealizedgains/lossesonthecontractdate.AlltheaccountingentriesarepostedintheGL
automatically.Considerablesavingscanbeachievedbothintermsoftimeandmoneybyexecutingtransactionscompanycodewisetherebyensuringaccountingof
allentriespertainingtoacompanycodeatonego.

Figure11&12belowgivesadiagrammaticprocessflowofthehedgemanagementprocessinSAPofacash
flowhedge:
PleasenotethattheexampleisnotbasedonExposureManagement2inEHP4butontheearlierExposureManagementmodule.However,evenafterEHP4,both

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theExposuremanagementmodulesareavailableinSAP.
Thedetailsoftheexampletransactionisgivenbelow:

HedgeItem
HighlyprobableForecastofpurchaseofRawMaterialpaymentexpectedtobepaidtotheVendorin75

ExposureDetails

ExposureDate

15Jun09

BetweenJune20,2009andAugust31,2009

ExpectedperiodwhentheFinished
Goodsareexpectedtobesold

days.CurrentDateApril1,2009.

therawmaterialpurchasedisusedinmanyproductsandtheeffectiveportionsofthehedgewhichis
lyinginOCIisnotreclassifiedtoprofitandlossimmediatelyonendingthehedgingrelationshipbut
reclassifiedgraduallyonatimebasedproratabasis(nobasisadjustmentismadewherethebalance
OtherAssumptions

inOCIisadjustedagainstthecarryingamountoftheInventory).Thisisasuitableapproximationto
satisfyIAS39whichallowsentitiestoreclassifythebalanceinOCItoprofitandlossoncetheproduct
madefromthatrawmaterialhasbeensold(incaseofcashflowhedgeofforecastedpurchaseofraw
materials).

Derivative
Derivative

FXForwardContract

ContractConclusionDate

01Apr09

ContractValueDate

05Jun09

Youcanclickontheimagesforalargerresolutionpicture

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Example:CalculationofHedgeEffectivenessanddistributionofNPV
BelowisaworkingonhowtheeffectivenessiscalculatedandhowSAPdistributestheNPV(NetPresentvalue)ofthederivative.Theinformationusedforthe
calculationisgivenbelowandtheworkingfollowsthereafter.Anexplanationofeachelementintheworkingisalsothere.Pleasenotethatallfiguresaretakenjust

forexamplepurposes.

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Notes:
ThedateofthederivativeisJune5,2008whichisthevaluedateoftheFXcontract,whilethedateoftheExposuretheHedgeItemisJune15,2008.The
dateofexposurehasbeenmadedifferentfromthedateofthederivativeasthiscausesomeineffectiveness
ItisassumedthattheannualizedinterestrateforUSDis2.5%andINRis5%.Theseratesareusedfordiscounting.Pleasenotethattheratesarenot
indicativeofactualratesandarepurelyforourexamplepurposes.TheSAPsystemusesZeroCouponYieldCurvestoarriveattheinterestrates
ThenumberofdaystobeconsideredfordiscountingisthedifferencebetweentheKeydate(whichinthiscalculationisApril30,2008)andthevaluedateof
thederivative(whichinourexampleisJune5,2008)/HedgeItem(exposuredateinourexampleisJune15,2008)
TheSAPsystemcalculatesthediscountingfactorbythefollowingthreemethods:
>Ifcontinuouscompoundingfactorhasnotbeensetwhilecustomizingandthetermofthecashflowisuptooneyear,thenthe
linearinterestcalculationmethodisused:
DiscountingFactor=1/(1+InterestRateXTerm)
>Ifcontinuouscompoundingfactorhasnotbeensetwhilecustomizingandthetermofthecashflowisoneyearormore,thenthe
exponentialinterestcalculationmethodisused:

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DiscountingFactor=1/(1+InterestRate)^Term

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Kumar S

>Ifcontinuouscompoundingfactorhasbeenset,thesystemusestheconstantinterestcalculationmethod,regardlessoftheterms
ofthecashflow:

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DiscountingFactor=Exp(InterestRateXTerm)
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Inourexample,thecontinuouscompoundingfactorhasnotbeensetandsincethecashflowislessthanoneyear,thediscountingfactoriscalculatedby:
Enteryouremailaddress
DerivativeDiscountingFactorforUSD=1/(1+(2.5%/360Days)X36Days)=0.997506234
Sincetheinterestrateisannualizedinterestrate,itisdividedby360toarriveatonedayrate.

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ThePresentvalueintherespectivecurrenciesisarrivedatbymultiplyingthediscountingratewiththeamountintherespectivecurrencies
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TheNetpresentvalueoftheDerivative/HedgeItemisthesumofthepresentvaluesoftheUSDandINRlegs
Thedesignatedratioofthederivativeandthehedgeitemiscalculatedby:
a.Derivative90,000(AmountDesignated)/125,000(AmountofDerivative)=0.72
b.HedgeItem90,000(AmountHedged)/100,000(AmountofExposure)=0.90
Thepreviousvalueisthevalueasperthelastpostedvaluation.GenerallyifthestartdateoftheDerivativeandthestartdateofthehedgeitemarethesame,
theNetPresentvalueofthederivativewillbezeroatinception.Hence,inourexamplethisvalueiszero

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TheHedgeRatioiscalculatedbyDeltaDerivativedividedbyDeltaHedgeitemwithoutthesigns,whichis42,922.54/39,874.56=1.0764395.Sincethisvalue
liesbetweentheallowedrangeof0.80and1.25,wecansaythattherelationshipisprospectivelyeffective
WeshallnowlookatthedistributionoftheNPV.TheNPVisdistributedthefollowingway:
>ThefreestandingportionisthatportionoftheNPVofthederivativewhichisnotcoveredbyanydesignation.Inourexampleitis59,614.64
42,922.54=16,692.10.ThisispostedtoP/L
>TheeffectiveportionisthatpartoftheNPVofthederivativewhichcoversthehedgeditem(thedesignatedpartofthehedgeitemNPV),
whichinourexampleis39,874.56.ThisispostedtoOCI
>TheineffectiveportionisthedesignatedportionoftheNPVofthederivativewhichisnotcoveredbythedesignatedhedgeitemsNPV.Inour
exampleitis42,922.5439,874.56=3,047.98.ThisispostedtoP/L

Example:Accounting
Belowaretwoexamplesoftheaccountingpostingsincaseofacashflowhedgeandafairvaluehedge.TheseexamplesarebasedonaworkingfromPwC.Ithas
beenmodifiedabit.Thescenarioisgivenforeachexamplefollowedbythepostings.

CashFlowHedge
AcompanywhosefunctionalcurrencyisINRisexpectingthesaleofaparticularequipmentwhichitmanufacturesseveralmonthsfromnow.Ithas
enteredintoafirmcontractwithabuyerinIndiaforthis.
However,itforecastspurchaseofarawmaterialfromUSwhichitexpectstopurchaseinUSDaftersomemonths.However,thecompanyplanstohedge
thecurrencyriskofthishighlyprobableforecastedpurchasetodayitself.
Hence,thecompanyentersintoapurchaseUSD/SaleINRforwardexchangecontracttohedgethecurrencyrisk.
Thisforwardcontractisdesignatedasacashflowhedgeofthehighlyprobableforecastedpurchase
IAS39requiresthefairvalueofthederivativetobebroughtintothebalancesheet.However,theloss/gain(whichisactuallythefairvalueofthe
derivative)isnottakentotheIncomestatement,buttakentotheequity.
TheamountintheequityisreclassifiedintheperiodwhentheInventorypurchasedhitstheIncomestatement.Thisnormallywillbe,whentheProduct
madeoutoftheinventoryissold.
HedgeInstrument=FXDerivative
HedgeItem=ForecastedPurchase

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FairValueHedge
AcompanywhosefunctionalcurrencyisINRhasenteredintoacontracttosupplyaproducttoacustomerintheUSinafewmonthstime.
TheCompanydecidestohedgethecurrencyriskonthisfirmcommitmentwhentheyactuallyreceivetheUSDfromthebuyer.Hence,thecompanyenters
intoasaleUSD/purchaseINRforwardexchangecontracttohedgethecurrencyrisk.
Thisforwardcontractisdesignatedasafairvaluehedgeoftheformcommitmentforsales.
Notethatinthecaseofahedgeofafirmcommitmentforcurrencyrisk,thehedgecaneitherbeacashflowhedgeorafairvaluehedgeastheboththe
cashflowsandthefairvalueareaffectedbythecurrencyrisk.
IAS39requiresthefairvalueofthederivativetobebroughtintothebalancesheetwiththecorrespondingentrytotheIncomestatement.
Correspondingly,thefirmcommitmentalsoneedstobebroughtintothebalancesheetbychargetotheIncomestatement.
Bythis,ifthehedgeisveryeffective,theentryfromthefirmcommitmentandthederivativeintheIncomestatementshouldcanceleachotherout.

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BringingintoBookstheFairvalueofFirmCommitmentsinSAP

>TransactioncodeTHM56isusedtoseethefairvaluechangeintheFirmcommitments.Thatis,tobringinto
booksthefairvalueofthefirmcommitments
>Usingthisinformationuserhavetopostthenecessaryjournalentriesinthesystemmanually
>Afterpostingthesedocuments,thencomebacktoTHM56andenterthedocumentnumbersagainstthefair
valuechangesshownbythesystem.Thiswillthenbemarkedbysystemanditwillnotbeshownagainasthose
forwhichentryneedstobepassed.
>Inpractice,THM56shouldberunonlyafterrunningthevaluationusingTPM1asTHM56willonlypickand
showonlyhedgerelationshipsforwhichthevaluationexistonthatkeydateanditisafirmcommitment.
HedgeAccountingChangesinEHP3&4

>CommoditiescanbeHedgedusingCommodityFutures/Options/ForwardTransactions
>SecuritiescanbeHedgedusingForwardSecuritiesTransaction(newproductcategoryisavailablenowto
createforwardtransactionsforStocks,InvestmentCertificates,Bonds,Shareholding)
>SecurityPositionscanbesplitupintosubpositionswhichwillallowthedifferentiationbetweenhedged
portionsofasecurityandthefreestandingportions
>HedgeDocumentationisnowavailable

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14ResponsestoHedgeManagement
rdsays:
July28,2011at20:31

HelloMr.Gopa,
CanIgetyourcontactnumber?
AtyourconvenienceIwouldliketocallyoutodiscusscoupleofissuesinTreasury.
Thanks
RD
Reply

gopakumar2010says:
July28,2011at20:57

HiRD
Pleaseacceptmyapologies.Iwillnotbeavailableforanyconsulting.
Thanks
GopaKumar
Reply

KrishnaKumarsays:
August22,2011at10:48

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HiGopa,
CanyoupleaseexplainfurtherontheCashFlowhedgeaccountingentriesforaprobableforcastedsalescontract.
Wehavetakena3monthsforwardcontractofUScurrencybasedonthesalescontractinthemonthofAug2011withRs
44.60spotandforwardof45.30.
Whatwouldbetheexactaccountingentriesintheinception,inthequarterend,inthetimeofmaturityofthecontract,inthe
timeofsaleofthegoodsandinthetimeoftransalationofUSDbasedontheforwardcontractrate.
Reply

gopakumar2010says:
August22,2011at20:14

HiKrishna
YoucanhavealookattheSAPTreasuryprocessmappingtoseeatwhatpointtheentriescomeandalsothe
modifiedPwcexampletoseetheentries.Thoughthecashflowexampleisincaseofpurchases,iamsureyoucan
followalmostsimilarprinciplestogettheentriesforsalesalso.However,Ishallputbelowsomeentriesbelow.
Hopeithelps.
1.attimeofcommencementofhedgenoaccountingentries
2.atvaluation1(TPM1)saythederivativeNPVis100,thentheentrieswillbe:
entry1.DRDerivative(B/S)100
CRDerivativeClearing(ifyouareusingaclearingaccount)100
entry2.DRDerivativeClearing100
CROCI(B/S)100
BalanceSheetwilllooklikeAssetsideDerivative100/LiabilitysideOCI100
3.atvaluation2(TPM1)saythederivativeNPVis90,thentheentrieswillbe:
entry1.DRDerivativeClearing10
CRDerivative(B/S)10
entry2.DROCI(B/S)10
CRDerivativeClearing10
BalanceSheetwilllooklikeAssetsideDerivative90/LiabilitysideOCI90
4.BankFLowsonduedateoftheforwardcontract(TBB1)
entry1.DRTechnicalClearing45,000
CRBankUSD(B/S)45,000($1,000@45attodaysspotrate)
entry2.DRBankLocalCurrency(B/S)44,800($1,000attheforwardrateincontract)
CRTechnicalClearing44,800
5.DerivedBusinessTransactionTPM18
entry1.resetofvaluation(unrealizedloss)
DROCI(B/S)90
CRDerivative(B/S)90
entry2.Realizedlossentry
DROCI(B/S)200(sincecashflowtakentoOCIuntilreclassified)
CRTechnicalClearing200
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7.CustomerPayment(F52)
DRBankUSD(B/S)45,000($1,000@45attodaysspotrate)
CRCustomerAccount44,950($1,000@44.95attheInvoicebokingrate)
CRRealizedExchangeDifferenceCustomer(P/L)50
6.Reclassification(THM54/THM58/THM10)
DRRealizedExchangeDifferenceCustomer(P/L)200
CROCI(B/S)200
Hence,attheendofeverythingtheRealizedExchangeDifferenceCustomeraccountwillshowtheneteffectof
hedginginthisexampleanetlossof150Thoughifitwasaperfectworldandaperfecthedgethelossfrom
derivativeshouldhaveoffsetthegainfromthecustomerpaymentandtherealizedexchangedifferenceaccount
balance=zero!
Regards
GopaKumar
Reply

Aloysiussays:
December9,2011at02:26

Thisisveryinformative.ItshardtofindSAPhedgingwriteupsasdetailedasthisandsosimplyexplained.WelldoneMr.
Gopa.
Reply

Jaspalsays:
January10,2012at07:53

Mr.Gopa,yourwriteupsaresimplyamazingandonsuchandcomplexandexotictopicoftreasuryveryraretofindsuch
clarity.
Indeeditisreallypleasuregoingthroughthese,pleasekeepthisupasitdoeshelpinresolvingmanyissuesofclients.
Reply

JhonPatricsays:
January30,2012at13:38

YourpostsaretouchingthecomplicatedareasofTR.Yourwritingsinsuchareaswithdetailsaremostwelcome.Idontknow
whydidyoustopwriting.Expectyoutoresumesoon.intheareaofMarketRiskAnalyzer,CRA..etc.Averyfewconsultants
haveclarityofconcepts.Welcomeagaininthisblog!
Jhon
Reply

JhonPatricsays:
January30,2012at13:41

GoodsiteforSAPTRconsultants
Reply

JhonPatricsays:
March2,2012at17:39

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AnywritingonAnalyzers?
Reply

Adityasays:
October10,2012at05:16

HiGopaKumar,doyouthinkSAPHedgeaccountingcanmeettherequirementsofUSGAAPFAS133requirements?My
businessclientisnotsatisfiedwithSAPstandardpostingsandissayingthatitdoesnotmeetGAAPrequirements
Reply

gopakumar2010says:
October11,2012at15:20

HiAditya
IcannotcommentauthoritativelyatpresentasIhaveleftsapconsulting,nowcloseto2years.Requirements
mighthavechanged.However,whileiwasstilldoingconsulting,wewereabletosetuparobustprocesswithin
sapincludinguseofexposuremanagementandalitbitofcustomdevelopmentforfas133reportingforaglobal
major.Ifeeladeepdomainunderstandinganddeepknowledgeofavailablesapfunctionalitieswillhelptosetupa
robustsystemwithminimalcustomdevelopments.
Regards
GopaKumar
Reply

Subhrajitsays:
November19,2014at11:25

HiGopa,
Thisisanexcellentblog.
HoweverIjustwantedtoknowcoupleofthings,
ForFXOptions:weexecuteTPM60whichcalculatesandstorestheNPVvalue,IntrinsicvalueandTimevalueinthetable
VTVBAR.
NowwhenweexecuteTPM1DoesitusethevaluefromVTVBARtableforpostingtheIntrinsicandTimeValuesto
accounting?
ordoesTHM80needstobecarriedoutandifitiscarriedoutwhatisthedifferenceinthevaluewhichisbeingstoredfrom
VTVBAR?doesitpickvaluefromsomewhereelse.
Letmeknowifyouhaveanyinputstothis.
Reply

Folakesays:
January22,2015at23:42

HelloMrGopa,
Canyouassistonthis?
Ihaveahighlyprobablepurchasetomakein6monthsinaforeigncurrency(EUR5,000).Tohedgeagainstforeigncurrency
fluctuationsthatiwouldrealizeinmyincomestatementi.egain/loss,Iwanttosetasideadesignatedbankaccountbalance
(EUR5,000).Isthispossible?

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SuchthattheFXgainsimakeovertheisrealizedonlyinOCI,andonthedayoftransactionboththecumulativeFXgainand
maturitydaylossarebothrecycledtoprofitorloss.
Isthispossible?
Reply

V.G.S.Roysays:
July1,2015at23:29

Hatsoffforyourunderstandingandthetimeandeffortyouhaveputintoconveyitinsuchalucidstyle.Really,peoplelike
youarerare!
Reply

GopaKumarS
TheTwentyTenTheme.

BlogatWordPress.com.

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