Hedge Accounting Tool

Our Hedge Accounting Tool is an easy to use Excel-based Model to determine the ineffectiveness that exists in a hedging transaction. In compliance with ASC 815 (formerly FAS133) and IAS39, the Tool computes fair value of the hedge instrument and up to five related hedges.  These amounts are then used to evaluate the amount of ineffectiveness over the entire term of the transaction on a prospective and retrospective basis. The Tool also calculates ineffectiveness at a point in time (such as a quarter end).   As with many of our products, it can be copied as needed, which is useful for performing a what-if analysis or determining the potential impact from changes in interest rates.

Tool Application

The Model can be used to compute fair value for the following types of transactions

1. For fixed or variable rate instruments
• Contractual rate can be fixed or variable
• Can be updated to reflect actual rates
• Market rates (used to compute fair value) can be adjusted monthly
2. For principal or notional amounts less than the hedged instruments
• Up to five hedging relationships allowed
• Can be less than the principal or notional amount of the hedged instrument
• Principal allocated to hedges on a proportional basis
3. For terms shorter than the hedged instrument
• Terms or time frames need not be identical
• Hedge must start at or after the underlying instrument
• Hedge must finish at or before the end of the hedged instrument’s term
• Fair value of the hedged instrument is adjusted to reflect the term of the hedge
4. For interest rate swaps
• Fixed for variable or variable for fixed

Under current accounting rules ASC 815 (formerly FAS133), a potential hedging relationship must be evaluated, prospectively, to determine if it is effective. This is done by calculating the fair value of both instruments, adjusting the fair value of the underlying instrument to correspond with the hedge in terms of notional amount and term, and then offsetting the changes in fair value to determine the ineffective portion of the transaction. This amount is then evaluated to determine if it fits within a pre established effectiveness range (generally 80% – 125% of the hedged instruments fair value). 

Transactions that are considered effective qualify for hedge accounting treatment. Hedge accounting allows changes in fair value to be offset, and thus reduces earnings volatility. Once you have qualified for hedge accounting, you must update the analysis (replacing expected rates and amounts with actual rates and amounts) and re-evaluate effectiveness at each balance sheet date in order to determine if you continue to qualify. If you qualify for hedge accounting you will also need to determine the ineffectiveness as of the balance sheet date to determine how much of the hedge does not offset and must be recognized.

In calculating fair value the Tool provides three interest computation models: a 360/30 Interest model (approximation using 360 days per year with 30 days per month), Actual Days using the calendar days for each month and year (considering leap years and the actual number days in each month), and 360/Actual Days Interest model that considers the days in the month (including leap years) but sets the days in the year to 360 (an interest model used by some finance companies). The 360/30 model is commonly used to simplify straightline interest computations where the actual days model is more precise.

The Tool can support maturities up to 480 months. Any number of months (2 at a minimum) can be entered for the term of the instrument providing maximum flexibility.

The Hedge Accounting Tool is available for $3,499 (US Dollars) for download.

Product Details
This product can be purchased online and downloaded for immediate use. Once purchased, there are no ongoing costs, and it can be used by unlimited users within the same Company or entity. In order to use our Tools or Models, you must have a current version of Excel (Office XP or greater).

We offer a variety of Excel-based tools to assist companies in complying with many of the more difficult accounting requirements. This Model take assumptions as inputs and with the push of a button, produces a valuation based on those assumptions using industry-standard methods. The formulas are protected from tampering to prevent accidental deletion or modification.

We also provide consulting services to assist with Fair Value evaluations. Please contact us at consulting@procognis.com for more details.

Feel free to contact us at sales@procognis.com if you have any questions about this Model.

Example Screenshots from our Hedge Accounting: