Case Study - Software
For over 20 years, PaperCut has made industry-leading print management software that reduces paper and saves trees. Now a global business with offshore subsidiaries in the USA and Europe, the head office in Australia faces significant exposure to foreign exchange risks that must be effectively managed.
Challenges
The company’s main challenges were:
Protecting foreign currency cash flows: Foreign currency fluctuations have a significant impact on the business’s bottom line, as over 90% of business sales are denominated in foreign currencies. Despite the business having some natural hedge in the form of foreign-denominated service contracts and vendor bills, these are not large enough to offset the exposure from foreign currency cash receipts. Foreign currency-denominated cash flows that come to Australia need to be proactively managed to achieve the best possible rates of exchange and to meet forecasts and budgets. Furthermore, any excess retained earnings from the international subsidiaries remitted to Australia also needed to be protected from the foreign currency volatility.
Forecast-Based Hedging: Hedging based on financial forecasts required a high degree of confidence in projections, necessitating process improvements within the finance team.
Accounting volatility: The longer the time between invoice issuance and payment receipt, the higher the risk of foreign exchange fluctuations that may adversely impact business earnings. Papercut average payment terms in excess of 30 days create the accounting volatility and an increased risk of significant unfavourable foreign currency movements. Hedge accounting helps us mitigate some of the accounting volatility that affects our financial performance results.
Limited Hedge Accounting Expertise: The finance team lacked direct experience in developing and implementing a hedge accounting program aligned with accounting standards.
Support
Hedge Effective Advisory provided the following services:
Development of a hedge accounting strategy to ensure compliance with the strict criteria of AASB 9.
Tailored hedge accounting documentation for each currency being hedged.
Managed services to run the hedge accounting program, reducing the burden on the finance team.
Hedgehog Software subscription for multiple finance team members to streamline hedge accounting processes.
Improved accounting efficiency with Hedgehog Software’s GL journals customised for streamlined upload into the NetSuite ERP system.
Ongoing advisory and audit support to ensure compliance and best practices.
Outcome
With our expertise and support:
The hedge accounting program effectively reduced accounting volatility resulting from the company’s foreign exchange risk management policy.
The finance team gained confidence that their hedging activities would not distort financial results.
With NetSuite’s easy interface for importing and exporting transactions, the monthly journal upload was all that was left to do.
The team could focus on core financial objectives rather than being bogged down in hedge accounting complexities. This is estimated at over one FTE day per month.
Our annual audit process has been shortened and simplified due to the availability of a comprehensive set of documentation that meets the requirements of IFRS 9 accounting standard. The independent auditors are now, on request, able to gain access to our formal hedge effectiveness documents, market-to-market calculations and the accounting journal models for purposes of the substantive audit testing. Having an independent specialist hedge accounting consultant behind the documentation instils a lot of confidence in our foreign currency management process in the eyes of both the auditors and the senior management team.
By partnering with Hedge Effective Advisory, the finance team at PaperCut successfully navigated hedge accounting complexities, allowing them to focus on their core mission while maintaining financial stability for the business.