Navigating the myriad rules of hedge accounting.
Minneapolis, MN – Cargill Risk Management’s Tim Stevenson sat down with HedgeStar’s Tim Potter to talk about the recent changes to ASC 815 and how companies can navigate the increasingly murky waters of hedge accounting.
“Historically, steel is one of most volatile commodities on the market–in part because there has historically been limited liquidity and barriers to effective hedging outside of supply chain contracts. Today, that path to more effective risk management has fewer roadblocks with the introduction of the Chicago Hot Rolled Contract (HRC) contract among others, providing greater depth for the bid/ask spread.
Widespread use of this contract for hedging, though, is slow to pick up steam. Not because of its value, but because of the steps in establishing new risk management processes, including being unable to qualify for hedge accounting within the strict confines of Accounting Standards Codification topic 815 – Derivatives and Hedging (“ASC 815”). While in many cases it can be easier for companies to mitigate price risk within a supplier contract, numerous stakeholders have interest in hedging financially and realize that overcoming this barrier can unlock value and opportunity.
One local company in Minneapolis, HedgeStar, works with corporations and governments to help sort through these issues and overcome some of the various barriers to applying hedge accounting. In particular, they help companies navigate “Proposed Accounting Standards Update—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (the “Proposed ASU”), which applies long overdue changes to ASC 815 specific to commodities that are expected to help break through some of these barriers and better align accounting results with risk management activities.”