Background
A multi-entity Saudi-based industrial group has a centralized treasury function that oversees hedging activities for the parent company and its subsidiaries.
The group was concerned with the volatility in the fair value of its outstanding multi-currency interest rate hedging portfolio of over SAR 1,000,000,000.
The group hired Ehata to apply cash flow hedge accounting, hence, spare fair value swings in Other Comprehensive Income (OCI) statement.
Our approach
At the outset, Ehata’s approach was to identify the qualifying hedging instruments.
The mandate team would then analyze if non-qualifying instruments could be amended to meet IFRS9 requirements or if they were intentionally disqualified due to their immateriality.
Upon completing the first two steps, the cash flow hedge accounting started with the ‘Set-up’ Phase, which includes the full spectrum of required support, that ranges from drafting the hedge designations and measuring of ineffectiveness, to the support we offer in quantifying the effect of credit risk and preparing of accounting journal entries.
Outcome
We negotiated the terms of cash flow hedge accounting designations with the company’s external auditors. The aim was to ensure they provide the group’s Treasury with the flexibility possible in future amendments to hedging instruments without jeopardizing the cash flow hedge accounting relationship.
The hedging instruments were held at a group level, while underlying loans are scattered among the group’s entities. Hence, we supported the company in the required inter-company mapping of hedged items and hedging instruments at parent and subsidiary levels.
We conducted effectiveness testing using best practices while maintaining a transparent and easy to understand methodology. Furthermore, we assisted the group in preparing yearend financial statements notes as per IFRS7, highlighting the instruments ranking on IFRS fair value hierarchy, financial performance sensitivity to interest rates, and the impact of hedging instruments on liquidity.
Ehata successfully negotiated the full hedge accounting spectrum with the company’s auditors and granted the company a flexible and repeatable hedge accounting exercise that fairly represents the group’s hedging activities in financial statements without penalizing its P&L statement with fair value swings.
