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Hedge Accounting is supported by Agiblocks CTRM

Hedge accounting
Posted by Bart Kroon
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The importance of IFRS compliance Commodity Trade and Risk Management software (CTRM) is once more confirmed in 2018. Agiblocks CTRM software supports the agricultural and soft-commodity industries. In 2018 a large number of old and new clients choose to integrate their Agiblocks  CTRM platform to their accounting and/or ERP applications. The confidence of these companies motivates Agiboo introduce state of the art IFRS compliant integrations and to further develop IFRS related functionality. As from 2019 IFRS 9 and IFRS 15 Hedge Accounting is supported by Agiblocks CTRM.

 

IFRS (Hedge) Accounting Support in Agiblocks CTRM

 

IFRS is a set of International Financial Reporting Standards proposed and maintained by the International Accounting standards Board. IFRS-9 requires commodities companies to keep track of  their trading assets (contracts, inventories) and provides minimum standards for substantiation and record keeping for hedge accounting. In short, to be able to comply to IFRS 9, a company should maintain records of all its’ individual trading  assets from the inception until their de-recognition as a trading asset (“realisation “), and be able to record and record on the fair value changes of these trading assets over their life time.

The Agiblocks IFRS 9 functionality records the inception and valuation of commodity contracts until these trading assets are de-recogniszed (“realized”) and then represented under IFRS 15 as revenue and cost of goods sold. Effectively IFRS 9 functionality in a CTRM allows a company to either report the fair value movements their forward book as unrealised P&L or to have the fair value movements reported as Fair Value movements on the balance sheet (hedge accounting).

Under IFRS 15  a company needs to recognise revenues and cost of goods sold, and such at the transfer of economic ownership of the goods. A challenge for commodity companies is transfer of economic ownership under uncertain commercial conditions. One could imagine a transfer before all pricing have been fixed, or when the final settlement weight has not been established. Under IFRS 15 a commodities company needs to account for such uncertainties based on respectively market values and estimates. Adjustments to these estimates have to be recorded at final settlement, but also at an end of a reporting period before such a final settlement.

 

Agiblocks IFRS 9

Agiblocks offers near – real time and full permanence records for IFRS 9. During the “life-time” of a trading asset, Agiblocks keeps track of the 2 variables that together determine the fair value movements.

1. The Contract Value of each contractual and/or inventory quantity, and included all cost associated to the contract and/or inventory.

2. The Market Value of each contract or inventory quantity. This Market Value based on actual market data, differential and/or ratio curves and currency rates.

These two variables are updated near real time; whenever the status of the trading assets change and on any given moment in time a user requires an updated value, for example

1. when pricings take place
2. when quantities are split, e.g. by partial reservations or by splitting deliveries, reservations, or inventory
3. when cost items are changed (due to change of estimates, or allocation of cost invoices to contracts)
4. when the position/valuation period/reporting period of an asset is changed
5. when the system wide re-estimation is run, e.g. at month-end

Agiblocks advanced accrual accounting functionality supports the recording of these fair value changes and ensures that accumulative fair value changes is kept track of as well. When booking IFRS 9 accruals is activated on an Agiblocks installation, the fair value movements are transmitted as accrual messages to the financial accounting system. For this purpose, new IFRS-9 Fair Value posting profiles have been added to Agiblocks.

 

Agiblocks IFRS 15

Agiblocks offers near- real time and full permanence records for IFRS 15. At the transfer of economic ownership of trading asset, Agiblocks records a revenue and cost of goods sold transaction. At the same time Agiblocks reverses all Fair Value movements recorded for the trading asset and thus effectively the executed transaction creates a movement from the “unrealised” to the “realised” financial accounts.

In the case a revenue or cost of goods sold moment is based on uncertain conditions, Agiblocks records the initial revenue and cost of goods sold based on the most accurate information at execution and when final settlement information is available the initial revenues and cost of goods sold are reversed and replaced with final values. In the period between transfer of ownership and the final settlement values are updated whenever the transactions are influenced thereto, for example;

1. when pricings take place
2. when final quantities are determined
3. when cost items are changed (due to change of estimates, or allocation of cost invoices to contracts)
4. when the system wide re-estimation is run, e.g. at month-end

To ensure alignment with the financial reporting timelines, Agiblocks ensures that movements in revenues and cost of goods, after the moment of the actual transfer of ownership, are allotted to the financial reporting period they actually take place. This approach assures that the financial reporting and the trade reporting will always be synced and aligned.

 

We grow with our clients and our clients grow with us

Agiboo will further focus to support the agricultural and soft commodity industries in 2019. We aim to bring further efficiency in trading and operations of our clients, and to embed even more industry and commodity specific functionality to Agiblocks. We help our customers in achieving their challenges and enable them to capitalise on the benefits of information technology.

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