Main content

Upstream: Outsourcing: Undisclosed Company: Hedge Reporting of Foreign Currency & Interest Rates

Opportune LLP was engaged by an upstream oil and gas producer (OIL Co.) to assist with the implementation of hedge reporting for their Euro-denominated expenses related to purchases of field equipment from European firms. OIL Co. is a U.S.-dollar functional currency entity that is exposed to currency exposure when the Euro moves against the dollar while budgeting for these expenses.

OIL Co. entered into a foreign currency swap that was designated as a cash flow hedge. Opportune drafted the contemporaneous hedge accounting documentation and provided the ongoing effectiveness testing, credit adjusted valuations and associated financial disclosures. With hedge designations in place, changes in the value of the swap that effectively hedged the currency exposure could be shown on the balance sheet rather than flowing through the income statement, reducing P&L volatility.

In addition to the foreign currency hedges, OIL Co. also hedges the variable rate debt it maintains. By entering into interest rate (IR) swaps, OIL Co. was able to reduce the variability of cash flows associated with the interest payments. Opportune assisted with the designation of these IR swaps under cash flow hedge accounting. Later, OIL Co. extended the term of this debt agreement and rolled the fair value of existing hedges into new hedges. This transaction created a late designation and OIL Co. was not certain if they would still qualify for hedge accounting. OIL Co. requested Opportune’s expertise to understand how to keep the IR swaps under hedge accounting, to explain the event to auditors and to understand the future accounting treatment. Opportune provided documentation, quarterly effectiveness testing and credit adjusted valuation for these new hedge relationships.

Opportune uses its deep experience to help companies achieve hedge accounting. Our experts work closely with management to reduce complexities and audit risk. Our strategic methodology is designed to support our clients’ particular business objectives, including driving profitability while meeting transactional standards.

Shane Randolph

Managing DirectorOpportune LLP