When talking about estimating the entries for FX derivatives, the interviewees made a clear division between the spot and forward elements. With regard to entries for the spot element, estimating was considered difficult and even unnecessary. This is because the entries result from changes in exchange rates which were considered unpredictable.
(Business Controller 2; Business Controller 3; Senior Business Controller.)
Although the accounting entries for spot elements were considered impossible to estimate, the interviewees highlighted that understanding the logic of these accounting entries could help in getting some sort of a view of the future. Business Controller 1 thought that there should be an understanding of the timing of the impacts from FX hedges. Business Controller 2, for his part, brought up the need to understand what affects
the entries and their size and where they are recognized in the statement of profit and loss.
He particularly mentioned the entries from hedge reserve and the entries from accounts payables and accounts receivables as ones that need to be understood. Thus, both entries for a derivative and for a hedged cash flow were considered relevant. Business Controller 2 also highlighted that management accountants should understand what kinds of impacts changes in exchange rates have in terms of accounting entries. In conclusion, understanding the logic of accounting entries for FX hedges, which was considered central with regard to analysis, was considered important with regard to estimating the entries for spot elements and hedged cash flows, too.
The entries for forward components, on the other hand, were considered stable enough so that estimation could be possible, at least at a rough level (Business Controller 2;
Manager, Group Accounting; Senior Business Controller). Senior Business Controller told that the entries that result from forward points seem linear in a big picture. The number of forward points is fixed when a derivative contract is entered into, and they are recorded linearly over the validity of the contract (Senior Business Controller). Senior Business Controller has, in fact, estimated the entries for forward points based on the statement of profit and loss in the company´s reporting system. He said that the estimates have been rough, but they have seemed to perform well at a high level.
The number of forward points was mentioned as a piece of information that is needed so that estimating entries for forward elements would be possible (Manager, Group Accounting; Senior Business Controller). Manager, Group Accounting said that front office has information on the number of forward points for each project and each hedge as they are the ones who enter into derivative contracts. Knowledge of how projects are progressing was also considered important in order to estimate how forward points impact the statement of profit and loss (Business Controller 2).
Other factors that were mentioned to make the estimation possible in general were information on projects and their open hedges (Business Controller 1; Business Controller 3), hedged cash flow amounts, in other words the nominal amounts of hedges (Manager, Group Accounting), changes in exchange rates (Business Controller 2; Business Controller 3) and the maturity of derivative contracts (Business Controller 3). Business Controller 2 also highlighted that, with regard to revenue recognition, the percentages that
are used to transfer cumulative amounts from cash flow hedge reserve to profit or loss as well as the amount of accounts receivables and accounts payables arising from hedged cash flows are important factors to take into account.
It was also noted that the final sales and cost amounts can be predicted as they should be the hedged amounts after both the hedged cash flows and the hedging instruments have been fully recognized (Senior Business Controller). Naturally, this only applies if the hedges have been effective and there have been no changes in the hedges during project execution. In addition, Manager, Group Accounting thought that the volume of entries for unrealised fair value changes can be somewhat estimated.
If you have hedges that were made at the beginning of a project and they start to materialise in a year or two, you can estimate at least the volume quite well. Of course, you do not know how exchange rates will change, but you can use volume to make some estimates of what you expect from unrealised [changes in fair value].
(Manager, Group Accounting.)
The interviewees mentioned a significant number of factors that make estimation difficult. The most mentioned factor was the unpredictability of changes in exchange rates (Business Controller 2; Manager, Group Accounting; Senior Business Controller). The large number of hedges and, consequently, transactions was another factor that was mentioned (Business Controller 3; Senior Business Controller). According to Senior Business Controller, a detailed analysis and estimation requires an unreasonable amount of work due to the large number of accounting entries. Business Controller 2 also highlighted that a detailed analysis and estimation can only be done at project level and not for all the entries. Business Controller 1 mentioned changes in projects as a factor that could affect estimation and make it more difficult. The same factor was also mentioned to affect the analysis, as described earlier in section 4.1.
An important factor that was considered to affect the possibilities to estimate accounting entries for FX hedges was data and possibilities to obtain it. Business Controller 3 pondered whether the data is available centrally and in the correct format for estimation, and whether the data makes it possible to estimate all entries. Business Controller 2 brought up the percentages that are used to transfer amounts from cash flow hedge reserve to profit or loss. He said that there is data available for the estimated revenue recognition
percentage but not for the percentage that is used for the amounts from purchase hedges.
This makes estimation more difficult. Manager, Group Accounting also brought up the data issue and told that the functioning and logic of the company´s new calculation model system can be found difficult to understand at first.
The interviewees found the current level of competence among management accountants to be insufficient for estimation. Senior Business Controller described that FX hedges and their accounting has previously been viewed as an area that is the responsibility of only a small number of professionals. Business Controller 1 highlighted the need for training on the entries and more help and support from those who are responsible for entering into derivative contracts and recording the accounting entries. Business Controller 3 emphasized that management accountants need more competence before they are able to estimate the entries, but that it would be possible.
We have a lot of work to do before we get to the point where we have data collected and people understand these things. So, I would say that the possibilities for estimation are currently zero in our group. But if we had proper templates and practices and systems, we could do anything. (Business Controller 3.)
In a similar fashion, also Manager, Group Accounting and Senior Business Controller considered management accountants´ possibilities for estimation to be good, at least at a rough level, after they have familiarized themselves with the logic of the accounting entries and have the data and information needed available. Senior Business Controller highlighted that the limitations that had been discussed earlier must naturally be considered when discussing management accountants´ possibilities for estimation. This was concluded to mean the limitations in, for example, predicting changes in exchange rates.
Business Controller 2 described that in-depth analysis and reporting development is needed so that management accountants can easily estimate the accounting entries for FX hedges. With regard to reporting development, Business Controller 1 emphasized the need for a common way of working and a common report template which can be used in estimation.