Background documentationHA Rule 100: Hedge Adjustment P&L

 

The Hedge Accounting rule 100 Hedge Adjustment P&L is used in the following hedging relationships:

  • 110 FVH: Stock Hedged with Forward Stock Transaction

  • 130 FVH: Stock Hedged with Total Return Swap

With this HA rule, the write-ups and write-downs for the valuation of the hedged stock are posted as a hedge adjustment. The hedging instrument is valuated as before.

Prerequisites

In Customizing for the Transaction Manager under Start of the navigation path General Settings Next navigation step Accounting End of the navigation path, you need to make the required settings for the valuation in the following Customizing activities:

  • In the Customizing activity Assign Update Types for Valuation, assign the update types to be used for the flows of the valuation (such as for the write-ups and write-downs).

  • In Customizing activity Assign Alternative Update Types for Position Outflows, enter the alternative update types for posting the hedge adjustment (condition: P-HA: Hedge Adjustment). In this way, the hedge adjustment is posted to a separate (P&L) account.

Features

Valuation Before the Start of a Hedging Relationship

Write-ups and write-downs in the security are written to the position component 1002 (Security Valuation).

The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

Valuation at the Start of the Hedging Relationship (Designation)

During a designation, transfer postings are made from the free-standing subpositions to the hedged subpositions or to the subpositions to be hedged. Before these transfer postings are made, the free-standing subpositions are valuated as part of derived business transactions.

Valuation at the start of the hedging relationship uses the same procedure as valuation before the start of the hedging relationship.

Valuations During the Hedging Relationship

Valuations during hedging relationships are performed as key date valuations (transaction TPM1) or as part of derived business transactions.

With a key date valuation, a check is run as to whether the hedging relationship is effective both retrospectively and prospectively. The result of the valuation can only be posted if effectiveness is given. In the case of ineffectiveness, the hedging relationship has to be dedesignated manually.

Valuations as part of derived business transactions also affect business transactions in the future. For example, with a designation, valuation is performed at the time of the dedesignation. For this reason, the existence of a valid effectiveness test is not a prerequisite for creating the derived business transaction. Consequently, valuation as part of a derived business transaction can also be performed for an ineffective hedging relationship. It is necessary for there to be a valid effectiveness test at the time when you fix the derived business transaction. In the case of ineffectiveness, the hedging relationship has to be dedesignated manually.

  • Hedged Item Valuation

    • In the case of effectiveness

      Write-ups and write-downs in the security are written to position component 1301 (Hedge Adjustment) as well as to position component 1300 (For internal calculation: To be classified). The update rules are determined from the settings made in the Customizing activity Assign Alternative Update Types for Position Outflows.

    • In the case of ineffectiveness

      Write-ups and write-downs in the security are written to the position component 1002 (Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

  • Hedging Instrument Valuation

    • In the case of effectiveness

      Write-ups and write-downs in the security are written to position component 1002 (Security Valuation) as well as to position component 1300 (For internal calculation: To be classified). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

    • In the case of ineffectiveness

      Write-ups and write-downs in the security are written to the position component 1002 (Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

A classification (transaction TPM101) can be used to split the valuation results determined into effective and ineffective portions. For this, the position component 1300 (For internal calculation: To be classified) of the hedged item and of the hedging instrument is transferred to the position components 1302 (Effective) and 1303 (Ineffective). Once the classification has been performed, the position component 1300 (For internal calculation: To be classified) acquires the value zero.

Example Example

  1. Valuation

    Valuation of a stock (hedged item) and of a forward stock transaction (hedging instrument). The hedging relationship is effective on the valuation key date.

    Stock: Write-up +100

    Forward stock transaction: Write-down -90

    Values of the position components for the stock

    1300 For internal calculation: To be classified

    100.00

    1301 Hedge Adjustment

    100.00

    1303 Effective

    0

    1304 Ineffective

    0

    Values of the position components for the forward stock transaction

    1002 Security Valuation

    -90.00

    1300 For internal calculation: To be classified

    -90.00

    1303 Effective

    0

    1304 Ineffective

    0

  2. Classification

    After classification has been performed, the following values are achieved for the position components:

    Values of the position components for the stock

    1300 For internal calculation: To be classified

    0

    1301 Hedge Adjustment

    100.00

    1303 Effective

    90.00

    1304 Ineffective

    10.00

    Values of the position components for the forward stock transaction

    1002 Security Valuation

    -90.00

    1300 For internal calculation: To be classified

    0

    1303 Effective

    -90.00

    1304 Ineffective

    0
End of the example.
Valuation at the End of the Hedging Relationship

With a dedesignation, the hedged subpositions or the subpositions to be hedged are transferred to the free-standing subpositions. Before these transfer postings are made, the hedged subpositions or the subpositions to be hedged are valuated for the last time as part of derived business transactions. Valuation at the end of the hedging relationship uses the same procedure as valuation during the hedging relationship. In addition, the valuation results are classified as part of a derived business transaction.

Manual Designation of an Ineffective Hedging Relationship

With a manual dedesignation, an additional retrospective effectiveness test is included in the test plan. This test needs to be executed manually. If the test is effective, the valuation performed as part of the dedesignation is performed in the Effective mode. If the test is ineffective, the valuation performed as part of the dedesignation is performed in the Ineffective mode. A classification is also performed as part of a derived business transaction.