Case Study - Hedging Future Gold Sales
A business with exposure to future gold prices was considering a hedging program using options but lacked clarity on how these instruments would impact financial reporting and board-level decision-making.
Challenges
The main challenges they faced were how to confidently present the accounting outcomes to the board of their proposed gold hedging program. The business was exposed to cash flow risk directly related to the future gold price and was considering using a number of hedging products, including call and put options. The Finance team and Board did not have direct experience in developing or implementing an appropriate hedge accounting program. They were looking for assurance of when and how these products would impact their financial statements.
Our support
Hedge Effective Advisory offered to help by providing the following services:
production of a Position Paper for the Audit & Risk Committee to approve, to include:
Worked examples with GL accounts impacted
Accounting for the premium paid, if any
provision of managed services to run the hedge accounting program for the Finance team, to include:
MTM valuations, including the time value element for options
Disclosure support for financial statements
Ongoing advice and support to the business during subsequent audits
Outcome
With our help, the hedge accounting program reduced the accounting volatility caused by their new gold hedging policy. The Finance team was also confident that their hedging activities would not distort the financial results. This allowed them to focus on their core finance objectives without getting bogged down in the details of hedge accounting.