Hedging Relationships (SAP Library

Hedging Relationships

Use

This function is provided to enable you to comply with US-GAAP / IAS accounting rules.

According to FAS 133 / IAS 39, derivatives must be shown in the balance sheet at fair value. If you wish to use a derivative financial instrument as a hedging transaction in accordance with FAS 133 / IAS 39, then special hedge accounting rules apply as far as the market value of the derivative is concerned. In this case, the hedging relationship and valuation functions must fulfill the following requirements:

The derivative must be linked to the exposure, and the hedging strategy must be defined at the start. You create a hedge plan for this.

As at the valuation key date (see Key Date Valuation), you must use the effectiveness test to check if the value change of the derivative in the previous period correlates closely enough with the value change of the hedged exposure. You can use various calculation methods to perform the retrospective assessment. The method used depends on the underlying hedge (Cash Flow Hedge, Fair Value Hedge or Net Investment in Foreign Subsidiary). For more information, see Retrospective Effectiveness Assessment and Effectiveness Test.

You then have to get the result of the prospective effectiveness assessment. For this, see Prospective Effectiveness Assessment.

If the hedging relationship proves effective in both the retrospective effectiveness assessment and the prospective effectiveness assessment, you then carry out the effectiveness valuation.

Integration

In order to calculate the market value of a derivative financial instrument, Hedge Management uses Mark-to-Market Valuation (stored in Mark-to-Market Valuation Financial Transactions) from Risk Management.

There is a link to Market Data Supply. This is important later on for the effectiveness test.

The key date valuation (accounting valuation of transactions relative to market value) reads saved net present values from the mark-to-market valuation. Unrealized gains and losses are distributed to appropriate accounts according to Hedge Accounting principles.

The key date valuation and the realized gains and losses ensure automatic integration to Financial Accounting.

The following graphic serves as an illustration of the described processes:

This graphic is explained in the accompanying text

Prerequisites

FAS 133 / IAS 39 is used once OTC net present values of the derivative financial instruments have been saved with a net present value type, and a valuation with this net present value type and the selected hedge accounting indicator is performed.

You can find out which settings are necessary in the Implementation Guide (IMG): See the appropriate section under General Settings ® Hedge Management.

Process Flow

For more information, see:

Hedging Relationship Management

Hedging Relationship Status Overview

Reverse a Single Hedging Relationship Dissolution

Reverse a Single Hedging Relationship Dedesignation

Exposure Upload from Money Market

Exposure Upload from External Source