The Value of Hedge Accounting?

I recently assisted in evaluating a FX exposure strategy. The problem for this corporate was that for different reasons it could not use hedge accounting thus creating PL volatility. The conclusion was that communicating the volatility to stakeholders with the risk of appearing not being in control outweighed the value of the hedge. The corporate therefore decided to stop hedging.

This is not the first time I’ve encountered this phenomena. In one of our peer meetings we surveyed how the peers would choose to manage a risk if hedge accounting could not be applied. A large part actually said that they would not hedge at all (interestingly the US based corporates were in a majority here). So how has hedge accounting increased transparency? I have heard many philosophical reasons defending hedge accounting but cannot see how it has made the accounts more transparent. But I know how much work the corporates had to do to comply and how much efforts they have to remain compliant. And I see risks that remain unhedged. So I still do not see any tangible value for corporates and its stakeholders from hedge accounting. And I don’t see how the transparency has increased.

The problem with financial risk is that it is regarded as something else than a business risk. The board delegates it to treasury to eradicate it. But we treasury professionals do know it is not possible. The only thing you in best case can do is to postpone the effects. And why shall you postpone it if you do not use that time to adjust to the new conditions?

Financial risks, I believe, shall be managed as a separate risk/opportunity in the same way as all other business risks. It is not a good idea for the board to bury and forget it in a hedge policy. A risk is a risk is a risk, manage it!