‘Quick fix’ for FX and hedging disclosures

At first glance, the subject of foreign exchange and hedging might not seem to make a particularly interesting blog. But bear with me.

I am always keen to challenge the vision of reporting, to advocate a wholesale review of its structure, but I also realise that ‘Rome wasn’t built in a day’.  We need to bear in mind the long-term gains that come from a more integrated reporting model, but we shouldn’t pass up the opportunity to make relatively simple and valuable steps along that path today.

As I think about the journey to really effective reporting, the first – and often neglected – step that I encourage companies to consider is a focus on the financial statements themselves. Investors tell us that there are a number of relatively simple ‘quick fixes’ that management can make to turn sometimes impenetrable financial disclosures into a useful source of insight into company performance.

One of those ‘quick fixes’ involves the disclosures that management makes about FX and hedging activity.  In the latest edition of ‘Investor views’, you will find some practical examples of the sorts of disclosure that investors tell us would transform today’s typical FX and hedging note into something that gives genuine insight.

The suggestions made by the investors we interviewed are not complicated. For example, a simple introduction to a hedging note that lays out what has – and what has not – been hedged. Are there additional economic hedges in place that have not met the requirements of hedge accounting?  What underpins the single FX number reported in the income statement?

Does this mean that we are accepting the inevitability of financial disclosures growing ad infinitum? Far from it.  However, to figure out what can be deleted from the back end of a report, we first have to help investors to understand the economics behind the numbers currently presented. Investors tell us about companies that present 10 pages of hedging disclosure but fail to  provide the context for those 10 pages  − notably, what is being hedged, at what price, for how long,  the percentage of the exposure being hedged and why.  By putting the note in a clear business context, we will be in a stronger position to determine which of those 10 pages are actually necessary to understand the company’s hedges – and which might be cut.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

Comments

[Steve Ralls]

Dear Charles,
I thoroughly agree with the thinking and though there are some standards that need change, the real change required is when preparing the fiancial statements. The IFRS Framework and IAS 1 already enable an Entity to report on assumptions about the future,major sources of estimation uncertainty, sensitivity of carrying amounts and possible outcomes. But often this is not done well.
best regards
Steve