|
|
Wednesday, 10th June 2026 |
| Impact of IAS 39 on currency hedging |
back |
|
By: Des Leavy, Des Leavy
|
| Des Leavy examines the impact IAS 39, the ‘derivatives standard’, has had on financial reporting requirements for corporate treasurers, as well as how it has affected their hedging strategies. |
Ulster Bank Capital Markets and RBS Global Banking & Markets work with our clients to help them quantify and minimise the P&L impact of hedging that may not qualify for hedge accounting treatment but which is commercially attractive. In this short article we give an insight into the issues.  | | Des Leavy |
The advent of IAS 39 in 2005 has had a wide range of impacts beyond being just a new way of accounting for business activities. For example, the IAS 39 rules on derivatives and hedge accounting has highlighted the risks faced by an organisation and how these risks are managed. This has led to changes in business practices, such as the methods used to identify and manage risks, as well as the products used. At Ulster Bank Capital Markets we understand how this has impacted our clients and has been reflected in the services we provide our customers.
In-depth FX exposure analysis
We have developed an ‘IAS Toolkit’ application which our clients are given access to. This allows them to perform an in-depth FX exposure analysis covering both transaction and translation exposure. We also use state of the art risk management tools and concepts that our clients now require, for example, in-depth exposure analysis is performed with complex simulation based models (like Monte Carlo models) which assist in quantifying risk based on probabilities (to specified confidence levels). Traditional more rudimentary risk quantification based on market shifts are no longer sufficient. This analysis allows clients (in conjunction with their auditors) to ensure that any hedging solutions identified provide both the desired economic and accounting results.
‘Split’ approach to hedging exposures
IAS 39 as an accounting standard can be quite limiting in the hedging approaches and products that can qualify for hedge accounting. Many structured or exotic hedging products may not qualify. The potential P&L volatility then arising from the inability to apply hedge accounting can in turn drive companies to not use these structured solutions, despite the economic benefits that they provide. At Ulster Bank Capital Markets we work closely with our clients and their auditors to offer alternative ways to structure any hedges, where desired structures can be adapted into a portfolio approach consisting of transactions that qualify for hedge accounting and those that would not. In combination, the desired economic payoff profile can be obtained but the presence of transactions that qualify for hedge accounting greatly reduce the potential P&L volatility and therefore make the transactions attractive for use.
Compliance assistance with IAS 39
In addition to more sophisticated concepts as listed above, we also assist clients with compliance of certain aspects of IAS 39, ensuring that we provide value as a banking counterparty. This can cover many areas, including explanation and discussion of accounting impacts (including conversations with external auditors), illustrative hedge documentation, as well as tools such as our IAS 39 Toolkit, which help perform quantitative hedge effectiveness assessments. |
Des Leavy is head of IRD/FX options at Ulster Bank.
|
|
|
|
