When it comes to hedge accounting, firms face common challenges that add unnecessary complexity to their operations. Chief among these are relying on spreadsheets and manual processes for tasks such as hedging interest rate risk or tracking cash flow volatility. But while spreadsheet usage is a typical practice for hedge accounting, it is a time-consuming and massively error-prone one.
In today’s blog post, we review some great outcomes of three firms that simplified hedge accounting practices through eliminating spreadsheets in favor of automation.
1. ACWA Power International
ACWA Power is a leading developer, investor, co-owner and operator of power generation and water desalination plants with presence in 11 countries.
Challenge: ACWA Power wanted to reduce time spent on hedge accounting by introducing an automated hedge accounting solution that could help them manage a portfolio of more than 350 interest rates swaps and FX contracts.
Results: ACWA Power selected FINCAD to assist with hedge accounting, with the following outcomes:
- Time-Savings: Before using FINCAD, key tasks such as setting up a SIBOR hedge effectiveness relationship, testing it, and generating the valuations often took up to two weeks to accomplish. However, using FINCAD these tasks are completed in a matter of a couple hours.
- Greater Consistency: FINCAD has enabled ACWA Power to define a process for hedge effectiveness and make it repeatable, helping to introduce greater efficiency and enforce consistency across all projects.
- Robust Reporting: Reports generated by FINCAD are detailed, and easily understood by ACWA’s Power internal users, as well as their internal and external auditors. The process of making necessary changes to underlying profiles has also been simplified.
2. Etrion Corporation
Etrion Corporation ("Etrion") is an independent solar power producer.
Challenge: The firm was looking for an efficient way to hedge its interest rate risk and reduce cash flow volatility. They considered outsourcing, but it was ultimately too costly and lessened the control they had over the hedge accounting process.
Results: Etrion selected FINCAD for hedge accounting and achieved the following:
- Better Efficiency: Etrion can now easily schedule its calculations to run as frequently as they need, with the assurance that the reports will be available when the company requires them.
- Control: With the ability to schedule calculations at the click of a button via FINCAD and receive an email notification when the reports are ready to be downloaded, Etrion’s hedge accounting process can now be run entirely in-house, giving the company complete control.
- Complying with Hedge Accounting Standards: FINCAD provides Etrion’s auditors with the information they require in terms of documentation and they are then able to audit that information easily.
3. Spectrum Brands
Spectrum Brands Holding Inc. ("Spectrum") is a global consumer products company with a large portfolio of popular consumer product brands.
Challenge: Spectrum performs hedge accounting on its hedges to avoid unnecessary volatility in its income statements. The company initially used plain vanilla average rate forwards to mitigate foreign exchange rate risk, but later added participating average rate forwards to its portfolio to benefit from favorable exchange rate movements. Spectrum had been using an Excel-based solution, which made hedge accounting processes time-consuming and error-prone.
Results: Spectrum ultimately moved to FINCAD for hedge accounting and realized the following advantages:
- Efficient Reporting: Transitioning from a spreadsheet system to FINCAD means that all data related to Spectrum’s 750 to 1000 foreign exchange and commodity hedge contracts is now in one place, and only needs to be entered once, thus reducing manual manipulation.
- Reduced Risk: The fact that there is less manipulation and better reliability using FINCAD (and its pre-built formulas), has served to decrease Spectrum's audit restatement risk.
- Documentation: FINCAD provides built-in documentation for fast and simple reporting. Users are able to export the necessary reports at the click of a button, and they are available immediately. Thus, reporting is more organized and easier to perform than previously.
Like to learn more about FINCAD’s solutions for hedge accounting? Contact us for a casual chat.