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    SAP FSCM TRM - Hedge Management Reporting Requirements - 2

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    SAP FSCM TRM - Hedge Management Reporting Requirements - 2

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    SAP FSCM TRM - Hedge Management Reporting Requirements - 2

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    of 8

    SAP FSCM TRM (TREASURY AND RISK

    EBOOK MANAGEMENT)

    SAP FSCM TRM -


    HEDGE MANAGEMENT
    REPORTING
    REQUIREMENTS IN
    SAP HEDGE
    MANAGEMENT AND
    ACCOUNTING

    Phone/Whatsapp: +1 (515) 309-7846 (USA)


    Email: [email protected] Website:
    www.zarantech.com

    1 Copyright© 2024, ZaranTech LLC. All rights reserved


    SAP FSCM TRM (TREASURY AND RISK
    EBOOK MANAGEMENT)

    Contents
    Hedge Management Reporting Requirements ............................................................................. 3
    What is Hedge Accounting? ...................................................................................................... 3
    Review Hedge Accounting ........................................................................................................ 4
    SAP Hedge Accounting Solutions .............................................................................................. 6

    2 Copyright© 2024, ZaranTech LLC. All rights reserved


    SAP FSCM TRM (TREASURY AND RISK
    EBOOK MANAGEMENT)

    Hedge Management Reporting Requirements

    What is Hedge Accou…

    Review Hedge Accou…

    SAP Hedge Accounti…

    What is Hedge Accounting?


    Entities are exposed to financial risks arising from many aspects of their business. Different
    companies are concerned about different risks (for example, some entities might be
    concerned about exchange rates or interest rates, while others might be concerned about
    commodity prices). Entities implement different risk management strategies to eliminate or
    reduce their risk exposures.

    The objective of hedge accounting is to represent, in the financial statements, the effect of risk
    management activities that use financial instruments to manage exposures arising from
    particular risks that could affect profit or loss (P&L) or other comprehensive income (OCI).

    Simply put, hedge accounting is a technique that modifies the normal basis for recognizing
    gains and losses (or income and expenses) on associated hedging instruments and hedged
    items, so that both are recognized in P&L (or OCI) in the same accounting period. This is a
    matching concept that eliminates or reduces the volatility in the statement of comprehensive
    income that otherwise would arise if the hedged item and the hedging instrument were
    accounted for separately under IFRS.

    3 Copyright© 2024, ZaranTech LLC. All rights reserved


    SAP FSCM TRM (TREASURY AND RISK
    EBOOK MANAGEMENT)

    Review Hedge Accounting

    In this section, we will briefly review some of the terms and characteristics related to hedge
    accounting. We will leave it to the reader to know by which accounting rules their company
    needs to follow.

    The following Hedge Categories exist according to IAS / IFRS and US GAAP, and are supported
    by SAP's Hedge Management solution.

    • Fair Value Hedge:Protection against price or market value change of a recognized Assets or
    Liability (e.g. Financial Instruments variable interest) or unrecognized firm commitment.

    Fair value hedges are accounted for as follows:

    • The gain or loss on the hedging instrument is recognized in profit or loss


    • The hedging gain or loss on the hedged item shall adjust the carrying amount of the
    hedged item (if applicable) and be recognized in profit or loss
    • Exception: If the hedging instrument hedges an equity instrument for which an entity has
    elected to present changes in fair value in other comprehensive income: both are posted
    to other comprehensive income (OCI)

    4 Copyright© 2024, ZaranTech LLC. All rights reserved


    SAP FSCM TRM (TREASURY AND RISK
    EBOOK MANAGEMENT)

    • When a hedged item is an recognized firm commitment (or a component thereof), the
    cumulative change in the fair value of the hedged item subsequent to its designation is
    recognized as an asset or a liability with a corresponding gain or loss recognized in profit or
    loss.
    • Cash flow Hedge:Protection against the change of an expected future cash flow as a result
    of certain risk, e.g. Foreign Exchange rate risk.

    Cash flow hedges are accounted for as follows:

    The separate component of equity associated with the hedged item (cash flow hedge reserve)
    is adjusted to the lower of the following (in absolute amounts):

    o The cumulative gain or loss on the hedging instrument from inception of the hedge;
    and
    o The cumulative change in fair value (present value) of the hedged item (i.e. the present
    value of the cumulative change in the hedged expected future cash flows) from
    inception of the hedge.
    • The portion of the gain or loss on the hedging instrument that is determined to be an
    effective hedge (i.e. the portion that is offset by the change in the cash flow hedge reserve
    calculated in accordance with (a)) shall be recognized in other comprehensive income
    (OCI).
    • Any remaining gain or loss on the hedging instrument (or any gain or loss required to
    balance the change in the cash flow hedge reserve … is hedge ineffectiveness that shall be
    recognized in profit or loss. Net Investment Hedge:Protection of an investment in a foreign
    business /company.

    5 Copyright© 2024, ZaranTech LLC. All rights reserved


    SAP FSCM TRM (TREASURY AND RISK
    EBOOK MANAGEMENT)

    Net investment hedges are accounted for as follows:

    A Net Investment Hedge is a specific type of foreign currency cash flow hedge that is used to
    eliminate or reduce the foreign currency exposure that arises from an entity's Net Investment
    in a Foreign Operation (NIFO). Update consolidation each period of the NIFO into the parent
    financial statements a foreign currency gain or loss is recognized in shareholders' equity.

    When a derivative hedging instrument is used, the effective portion of the change in the fair
    value of the instrument is recognized in equity. The ineffective portion is recognized
    immediately in the P&L.

    A Hedging Relationship relates to exactly one Hedge Category.

    A hedging relationship qualifies for hedge accounting only if all of the following criteria are
    met:

    • It consists only of eligible hedging instruments and eligible hedged items.


    • Formal designation and documentation of the hedging relationship exists.
    • The entity's risk management objective and strategy are known.
    • It meets the hedge effectiveness requirements.

    SAP Hedge Accounting Solutions


    SAP has two Hedge Accounting solutions:

    • Hedge Accounting for Exposures (or E-Hedge Accounting/E-HA, for short) is the Hedge
    Accounting solution when there is interest rate risk and the hedged item is not in Treasury
    and Risk Management Position Management. The transaction codes to this solution start
    with THM*, e.g. THMEX - Hedge Plan
    • Hedge Accounting for Positions (or P-Hedge Accounting/P-HA, for short) is the solution in
    which Treasury positions can be hedged in accordance with specific Hedge Accounting
    rules. There is integration with Treasury and Risk Management Position Management for

    6 Copyright© 2024, ZaranTech LLC. All rights reserved


    SAP FSCM TRM (TREASURY AND RISK
    EBOOK MANAGEMENT)

    when debt held in the Securities module is hedged, for example. This solution integrates
    with Exposure Management 2.0 and works with the Hedge Management Cockpit. This
    solution supports prospective effectiveness testing with linear regression and Market Data
    Sets (MDS) to allow for effectiveness testing with multiple scenarios.

    When functionality was being developed for the IFRS9 changes, SAP decided to make all the
    new functionality available for the Hedge Accounting for Positions (or P-Hedge Accounting)
    solution. Moving forward, we will discuss only the Hedge Accounting for Positions (or P-Hedge
    Accounting) solution.

    SAP's Hedge Management Solution:

    • Is fully integrated into Treasury subledger, the SAP general ledger, and adhers to its basic
    principles of business transactions
    • Supports the most common use cases
    • Includes process automation including automatic designation
    • Is capable of managing high volumes of hedging transactions
    • Offers a fully integrated snapshots of exposures of future transactions for management of
    an audit trail or for accounting reasons

    The way to the Hedge Accounting for FX Risks in SAP Treasury presented in this lesson is:

    Prerequisites:

    • EhP 8 or S/4 HANA OP or S/4 HANA Finance


    • New yield curve framework activated
    • CVA/DVA in use
    • Exposure Management 2.0 and Net Open Exposure Report

    7 Copyright© 2024, ZaranTech LLC. All rights reserved


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