Hedge Effectiveness Testing is required by FAS 133 and IAS 39 only when accounting for financial derivatives designated as hedge instruments. This is an optional step in the accounting process and may be excluded via a company level parameter.
Retrospective Effectiveness Testing is a comparison of the past gains or losses on your hedge instruments versus to the past losses or gains your hedge items. Oracle Treasury supports several methods of Retrospective Effectiveness calculations based on Revaluation results including Period Offset, Cumulative Offset, Shortcut / Fully Effective, Manual Entry, and No Testing.
The Retrospective Effectiveness percentage is calculated automatically based on the test method defined on each hedge and the gains and losses on the hedge instrument and hedge item. The system determines whether this percentage effective for each hedge is within the minimum and maximum tolerances to be considered effective during the accounting period. Oracle Treasury then automatically allocates the total derivative gain or loss needed for accounting purposes. Unrealized gains/losses of hedging instruments are split into effective, ineffective, and excluded amounts so that journal postings are done to the proper accounts. Similarly, Oracle Treasury calculates any gain or loss reclassification from prior periods which require recognition during the current period.
Navigate to the Retrospective Hedge Effectiveness Testing window.
Select your company and the accounting batch.
Select Run Test button. A concurrent request will be submitted.
Note: The concurrent request will process each outstanding hedge in accordance with the selected retrospective hedge method
Cumulative Offset: The program will add up all the hedge instrument gains/losses since the hedge inception and compare them to all the hedge item losses/gains. If the percentage offset falls within the predefined tolerance level, the hedge will pass the test and the derivative gains/losses will be split into effective and ineffective parts. If the percentage offset does not fall within the predefined tolerance level, the hedge will fail the test and the derivative gains/losses will be deemed ineffective.
Manual Entry: Rather than have the system calculate it, you will have to enter the effectiveness percentage manually. If the entered percentage offset falls within the predefined tolerance level, the hedge will pass the test and the derivative gains/losses will be split into effective and ineffective parts. If the entered percentage offset does not fall within the predefined tolerance level, the hedge will fail the test and the derivative gains/losses will be deemed ineffective.
No testing: The hedge is not picked up for effectiveness testing.
Period Offset: The program will compare the hedge instrument gains/losses in the current batch to the hedge item losses/gains in the current batch. If the percentage offset falls within the predefined tolerance level, the hedge will pass the test and the derivative gains/losses will be split into effective and ineffective parts. If the percentage offset does not fall within the predefined tolerance level, the hedge will fail the test and the derivative gains/losses will be deemed ineffective.
Shortcut/Fully Effective: The system assumes 100% effectiveness of the hedge without making any calculations and deems 100% of the hedge instrument gains/losses to be effective.
Once the concurrent request is complete, re-select the company and the batch number in the Retrospective Hedge Effectiveness Testing window. The testing results will be displayed.
Once you are satisfied with the retrospective effectiveness testing results, select Authorize button to authorize this batch.