As a result of FAS 133, companies are required to mark their derivative holdings to market and reflect resulting gains and losses on a profit and loss statement, unless stringent criteria are met.  By identifying an association of an underlying instrument with a derivative, the gain or loss can be deferred by classifying it as a hedge transaction.

Accounting for changes in the fair value of a derivative depends on the intended use of the instrument, with the resulting designation as follows:

• Fair Value Hedge: For a derivative designated as hedging  (the exposure to changes in the fair value of a recognized asset or liability), the gain or loss is recognizable in earnings in the period of change, together with the offsetting gain or loss on the hedged item, which is attributable to the risk being hedged.  The effect on earnings is limited to the portion not considered effective in achieving offsetting changes in fair value.
• Cash Flow Hedge: For derivatives that hedge exposure to variable cash flows of a forecasted transaction, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income.  It is subsequently reclassified into earnings when the forecasted transaction affects earnings.  The ineffective portion of the gain or loss is reported in earnings immediately.
• Foreign Currency Hedge: For derivatives that hedge the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income as a part of the cumulative translation adjustment.
• Non-Hedge: For derivatives not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change.

ATI can leverage the core piece of your existing systems or help implement functionality within a vendor based system to:

• Link Cash Assets to Derivatives
• Conduct Qualitative Tests
• Document each hedge
• Perform Regression Analysis
• Measure Ineffectiveness portion to be posted to the General Ledger

We can also assist in assembling and implementing the complex requirements for calculating Retrospective Testing, storing historical data for calculating Effectiveness Testing for user-defined time periods, and developing new back-test scenarios for “new” hedging strategies.