Don’t Risk a Restatement Due to Improper Hedge Accounting

FAS 133, FAS 157 and Sarbanes-Oxley impose strict documentation and reporting requirements on companies using derivatives. Improper application of these standards can result in undesirable earnings volatility or potential restatements. It is critical to match the timing of your derivative against the hedged asset to ensure favorable and the most suitable accounting treatment.

DAG can eliminate the burden of these complex reporting standards with accounting and valuation outsourcing services. DAG supplies clients with all necessary documentation and data to fulfill FAS 133 and FAS 157…from initial hedge designation and effectiveness testing to ongoing journal entries.  The steps necessary to accurately comply with these strict accounting standards can appear daunting to those unfamiliar with hedge accounting.  Our years of experience will guarantee the reporting process will be accurate and complete, saving you any undue concern.

DAG has worked with clients through all types of transactions and possibilities including:

  • Terminations – Terminating a hedge can occur for different reasons.  For example, the underlying asset or liability is sold making the hedge obsolete, the hedge may expire naturally, or the client determines the hedge is no longer effective.  A termination will have an effect on revenues, expenses and result in a change in net position.
  • Re-designations – After a prescribed value date, the hedging relationship has to be re-designated or dissolved based on a management hedge decision.   Re-designating a hedge is one of the most challenging areas of hedge accounting because of changes in the fair market value when switching from one hedge to another.
  • Mark-to-market – The repeated adjustment of a derivative’s value is known as ‘marking to market’.  This may result in large swings in the profit and loss account, but if handled properly, hedge accounting will balance out the changes in value.

DAG’s valuation services additionally serve as a check on bank statements, as well as calculating future hypothetical values based on “what-if” rate scenarios and potential market movements.