Treasury Management and Regulatory Compliance Solution Suite

Transcription

1 TRIPLE POINT SOLUTION BRIEF Treasury Management and Regulatory Compliance Solution Suite COMMODITY XL FOR HEDGE ACCOUNTING COMMODITY XL FOR FAIR VALUE DISCLOSURE TRIPLE POINT TECHNOLOGY, INC. TPT.COM

2 HEDGE ACCOUNTING ASC 815 (FAS 133), ASC (FAS 161) and IAS 39 (IFRS 9) are similar in concept in that they require derivatives be measured and recognized at fair value on the balance sheet, and that market changes to the asset value flow directly to the income statement. Business Problem: Wildly Fluctuating Earnings While hedging can minimize economic risk from commodity price fluctuations, it also creates a difficult and complex management problem. Volatility of derivatives marked-tomarket and shown on the income statement can create large swings in earnings from period to period. Wildly fluctuating earnings are in direct conflict with investors desires for smooth earnings growth, putting company and management reputation at risk. Hedge Accounting Reduces Earnings Fluctuations ASC 815 (FAS 133), ASC (FAS 161) and IAS 39 (IFRS 9) help alleviate the problem of derivatives causing large fluctuations in earnings. They all make P&L exceptions for hedges that can be proven to protect against adverse volatility in the underlying commodity. Hedge accounting recognizes the offsetting effects between the derivative and underlying commodity, allowing an organization to recognize the net profit or loss at the same time. This ensures that when the underlying commodity impacts earnings, so does the derivative. Requirements of Hedge Accounting Under these regulations, strict requirements including detailed documentation must be met in order to qualify for hedge accounting status. A risk management policy that includes clearly stated objectives, controls and procedures needs to be in place. The company must also document the following: objective type of hedge description of hedge underlying commodity and derivative type of risk being hedged (e.g. price or credit) length of hedge prospective and retrospective assessment method to be used how hedge effectiveness will be measured Assessing Hedge Effectiveness Once designated for hedge accounting status, a derivative hedge must be assessed in two ways: Prospectively, at the time of the hedge, to ensure that it is expected to be effective, and Retrospectively, throughout the life of the hedge, to ensure that it remains effective Triple Point Hedge Accounting COMMODITY XL FOR HEDGE ACCOUNTING EXTERNAL FEEDS HEDGE ENGINE REPORTS ACCOUNTING Trade Capture hedge linking Real-time Position Fair Value Reports Market curves Market data Hedge Documentation objective type of hedge description type of risk length of hedge assessment method Effectiveness Tests Option Time & Intrinsic Value Effectiveness Tests & Measurements P&L Changes Financial Systems Feed Mark-to-Market Engine Audit Log OCI Changes TREASURY MANAGEMENT SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 2

3 Two Common Methods to Measure Hedge Effectiveness Provides fast, easy deal capture with trade information flowing immediately to everyone in the value chain, ensuring all participants work with current information Saves all trades in a central repository eliminating local data stores and ensuring auditability of all transactions Maintains all documentation within the system such as hedge objective, type of hedge, description of hedge, type of risk, length of hedge and prospective and retrospective assessment to be used Enables what-if scenarios prior to deal execution, allowing traders to test economic benefit and prospective hedge effectiveness Tests hedge effectiveness on prospective and retrospective basis Generates reports automatically for each cycle close and archives for later viewing Bifurcates option fair value into intrinsic and time value Generates journal entries that follow accounting cycle Reclasses changes to earnings and OCI and seamlessly integrates with accounting systems to ensure timely, accurate and mistake-free updates to financial statements Consolidates financial statements into a single currency and ensures compliance with ASC 830 (FAS 52) and IAS 21. There are two common methods to prospectively and retrospectively test hedge effectiveness: Dollar Offset method measures changes in fair value of the underlying commodity against the hedging instrument (should fall within a range of 80 to 125% to be considered effective) Regression Analysis where an R-square of.80 or better means the hedge is effective COMMODITY XL FOR HEDGE ACCOUNTING Commodity XL for Hedge Accounting supports a comprehensive risk management program that enables firms to balance optimal economic benefit, risk management and stable financial statements. It provides a single platform to effortlessly ensure compliance with ASC 815 (FAS 133), ASC (FAS 161), IAS 39 (IFRS 9), CICA 3865, AASB 139 and SAS 133. Unmatched Hedge Accounting Functionality Forecasts earnings at risk, shocking curves by percent or standard deviation Allows users to pre-define a variety of hedge objectives and choose from these definitions as trades and exposures are entered Classifies hedges as cash flow, fair value or economic Available modules for Commodity XL for Hedge Accounting: Commodities Foreign Exchange Interest Rate TREASURY MANAGEMENT SOLUTION BRIEF Commodity XL for Hedge Accounting automates the entire hedge accounting process. TRIPLE POINT TECHNOLOGY, INC. 3

4 FAIR VALUE DISCLOSURE An important aspect of today s more stringent regulatory and corporate governance environment is the movement away from historical Cost accounting and towards Fair Value (mark-to-market) disclosure for certain classes of assets and liabilities on the balance sheet. Regulators and shareholders are insisting on transparency, verifiability and validity of accounting figures. Cost accounting, for many assets, does not provide an accurate picture of value or risk to an organization because the worth of the asset has changed dramatically since initial purchase. Business Problem: Regulation Requires Fair Value Disclosure of Hard to Value Securities ASC 820 (FAS 157) AND IFRS 7 require organizations to derive market prices for multiple types of assets and liabilities. The regulation requires companies to measure and disclose the mark-to-model techniques and worth of hard to value instruments. Robust System Needed to Ensure Proper Fair Value Disclosure Organizations must have a standard framework and rigorous processes in place to define, measure and disclose fair value methods and valuations. A sophisticated and robust software system ensures proper checks and balances, consistency of methods and auditability in the assignment of levels and the disclosure of mark-to-model assumptions and valuations. Increased transparency provides the confidence in valuations of assets and liabilities required by stakeholders. Requirements of Fair Value Disclosure ASC 820 (FAS 157) and IFRS 7 provide consistency and comparability in fair value measurements by: Defining fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Requiring certain methods be used to derive fair value as a market-based measurement, not an entity-specific measurement, based on assumptions market participants would make in pricing the asset or liability Expanding disclosure requirements about fair value measurements Triple Point Fair Value Disclosure COMMODITY XL FOR FAIR VALUE DISCLOSURE EXTERNAL FEEDS EXAMPLES Level 1 Quoted prices for identical assets or liabilities in active markets for full term. Exchanges traded investments, futures and actively traded debt Level 2 Inputs other than Level 1 that are either directly or indirectly observable including: quoted prices for similar assets / liabilities; inputs other than quoted prices that are observable. Plain vanilla interest & credit swaps Level 3 Unobservable inputs developed using estimates and assumptions which reflect those that market participants would use. Complex & long-dated derivatives TREASURY MANAGEMENT SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 4

5 Establishes a Three Level Hierarchy for Measuring Fair Value Level 1 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date Level 2 Inputs other than Level 1 that are either directly or indirectly observable including quoted prices for similar assets / liabilities and inputs other than quoted prices that are observable Level 3 Unobservable inputs developed using estimates and assumptions which reflect those that market participants would use COMMODITY XL FOR FAIR VALUE DISCLOSURE: ONLY INTEGRATED SOFTWARE SOLUTION FOR ASC 820 (FAS 157) AND IFRS 7 COMPLIANCE Categorizes fair value measurements by valuation hierarchy, with separate quantitative disclosures for assets and liabilities Provides Level 1, 2 and 3 roll forward activity and schedules Facilitates Day 1 gain tracking and reporting Produces gains and losses, both realized and unrealized, included in earnings for Level 1, 2 and 3 fair value measurements Provides fair value of net claims against counterparties Generates month-to-month analyses of fair value levels and tracks valuation transitions from one level to another Consolidates financial statements into a single currency and ensures compliance with ASC 830 (FAS 52) and IAS 21. Commodity XL for Fair Value Disclosure is Triple Point s comprehensive module for ASC 820 (FAS 157) and IFRS 7 compliance. It provides the tools and framework to define, measure and manage fair value levels and meet all disclosure requirements. Commodity XL for Fair Value Disclosure provides the consistency and comparability of fair value measurements for stakeholders to confidently do business with your organization. Unmatched Fair Value Disclosure Functionality Captures valuation level by trade or classifies trades using a rule-based method Supports large quantities of data and is scalable to handle growing trade volumes Provides a credit-adjusted MTM for both assets and liabilities by counterparty Uses repeatable and optimized procedures making it intuitive to navigate Classifies fair value of strips or group trades based on threshold rules (90/10) to minimize Level 3 exposure Commodity XL for Fair Value Disclosure is the only solution to meet all ASC 820 (FAS 157) and IFRS 7 requirements. Conclusion The increasingly stringent and unforgiving regulatory environment calls for a modern, next-generation integrated commodity trading and risk management system. By deploying such a system, companies can gain advantage over competitors who sub-optimize risk management and hedging those who choose to manage financial statements over economic impact. TREASURY MANAGEMENT SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 5

6 Triple Point s Treasury Management and Regulatory Compliance Solution Suite Triple Point s Software Assisted Compliance (SAC) solutions automate all processes for hedge accounting and fair value disclosure, enabling organizations to maintain earnings, stock value and shareholder confidence. Available modules: Commodity XL for Hedge Accounting: Commodities Commodity XL for Hedge Accounting: Foreign Exchange & Interest Rates Commodity XL for Fair Value Disclosure Commodity XL for Enhanced Disclosures Treasury and compliance solutions are operational or being implemented at several notable customers including: ABOUT TRIPLE POINT TECHNOLOGY, INC. Triple Point Technology is the leading global provider of cloud and on-premise Commodity Management software that delivers advanced analytics to optimize end-to-end commodity and energy value chains. The company provides real-time, innovative solutions to competitively address the complex and volatile commodities supply chain: buying, selling, trading, and procurement; enterprise risk management; scheduling and logistics; storage; processing; and settlement and accounting. Triple Point s Commodity Management platform enables over 400 customers in 35+ countries to profitably manage exposure to energy and raw materials across industries, including energy, metals, minerals, agriculture, transportation, shipping, consumer products (CP), industrial manufacturers, and big box retailers. Triple Point was named a Leader in Gartner s ETRM Magic Quadrant for its completeness of vision and ability to execute in 2009, 2010, 2011, and Founded in 1993, the company employs over 800 staff in 14 offices and support centers around the globe. World Fuel Services Evonik Industries Magellan Midstream Xcel Energy Unilever Bruce Power Hunt Oil TransAlta Tullow Oil Petra Foods Chiquita Iberdrola Renewables How to Get Started To learn more about how Triple Point s treasury and compliance solutions can help your business, please contact us at: Triple Point Technology, Inc. Global Headquarters 301 Riverside Avenue Westport, CT USA Tel: Fax: Web: info@tpt.com TREASURY MANAGEMENT SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 6