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Calyon held a conference on the settlement of derivative transactions in Hungary
In collaboration with PriceWaterhouseCoopers, Calyon helds a conference for those major Hungarian companies, who are interested in the settlement of hedging and derivative transactions. The main problem of risk management transactions is that while the overall result of two or more transactions might be favourable, a derivative transaction on its own may even end in a loss. It matters a lot how all this is captured in the books.
In the current volatile environment, adequate planning of operations, including revenues, expenditure and the cash flow, is becoming increasingly important for companies and banks alike. Well selected hedging transactions are also often used, but the impact of even perfect hedging on the corporate income may also be negative, if transactions are not booked properly. The conference organised by PriceWaterhouseCoopers and Calyon Bank on June 9th 2009 was dedicated to the accounting issues related to hedging and to derivative instruments.
Transactions may be accounted as hedging and non-hedging transactions, while according to the contents, settlement may be based on fair or other valuation. Non-hedging settlement involves a risk of considerable volatility in the results, while hedging settlement and adequate initial efforts can significantly reduce volatility.
In international accounting (IFRS), fair valuation must be applied to derivative transactions, while in the Hungarian regulations it is only optional; reports are generally not prepared with fair valuation. In line with the principle of prudence, here we report only the realised income and the non-realised loss. On the other hand, the profit and loss statement prepared with fair valuation reflects the fair value of the non-hedge derivative transactions both in the Hungarian and IFRS reports.
The non-realised income of a derivative hedge transaction is calculated in tandem with the income from the hedged transaction, in the same amount but with a contrary prefix, in the profit and loss accounting not prepared with fair valuation. On the other hand, the efficiency of the hedge must be documented in the reports prepared with fair valuation, when a hedge type derivative transaction is accounted. In a cash-flow or net investment type hedge transaction the fair value of the effective part must be reported in the equity, while any other change in the fair value must be reported in the profit/loss statement.
There are no special rules for embedded derivatives in the Hungarian accounting system. In an IFRS report, first the embedded derivative must be identified and then it needs to be analysed whether the derivative transaction should be separated from the underlying transaction and accounted separately or whether it should be treated together with its underlying transaction. The decision making tree helps, but for a complicated product the final answer can be provided only based on a thorough analysis and a consultation with the auditor.
