One of the most touted headlines around the recent FASB Exposure Draft dealing with hedge accounting is the fact that commodity hedgers will be allowed to bifurcate risk.
In other words, hedgers will be able to evaluate effectiveness against any contractually identified component (e.g., the nickel component of stainless steel), rather than the component plus all associated changes. This is expected to dramatically relax restrictions to gaining special hedge accounting, increasing the number of companies that can benefit from the treatment.
There is a catch, however. Note the words “contractually identified” in the previous paragraph. That is absolutely key, and it creates a critical task for commodity hedgers (and potential commodity hedgers) to accomplish before any changes to GAAP take effect.
As a result of this provision, Treasury personnel interested in taking advantage of bifurcation need to meet with the Procurement team to ensure contracts (either master agreements or individual transaction documents) call out relevant components specifically, with an index-based or referenceable price. Necessary changes, fortunately, are relatively formulaic; it is not anticipated that simply identifying individual components for pricing will dramatically effect the relationships between suppliers and customers.
Hedging can still take place without this, but only according to today’s “all-in” rules.
Additionally, the Exposure Draft creates an ideal impetus for commodity hedgers to review their hedge programs holistically. In particular, they should take a look at the financial instruments and derivatives they’re using to actually perform their hedges, and whether the model will be sustainable under the new rule set.
If you need help, Hedge Trackers’ team of commodity hedging experts is here to lend a hand. Contact us today, or call 408-350-8580 to speak to a consultant about how the FASB changes might affect your company.