Petrobras hedge accounting methodology upheld by CVM

By: Craig Haymaker, Chief Operating Officer

On March 7, 2017 the CVM, Brazil’s securities industry watchdog, recommended Petrobras restate their financial results from 2013-2016. A decision was made by Ivan Monteiro, Petrobras CFO, to appeal the decision and keep their current hedge accounting practices. The recent ruling published on Wednesday, July 12, 2017, to uphold the appeal filed by Petrobras is shedding light on the importance of having a strong hedge accounting program, and a strong partner that can provide auditors with detail and clarification on the methodology used.

Hedge accounting is complicated, are you prepared?

Hedge accounting is complicated enough, but more so when your auditors, regulators, or board directors start asking for clarification and details around the methodology. HedgeStar knows hedge accounting is difficult to apply and leads to divergent interpretations. We eliminate that burden on clients by interfacing directly with auditors, and using our domain expertise to address issues of interpretation and judgment.

Tim Potter CPA and hedge accounting manager for HedgeStar says, “We work with numerous companies, both public and private, and their audit teams, advising on tens of thousands of hedging transactions. Our team has prepared countless presentation and supporting documentation for audit committee, board, and analyst review.”

The consequences may be significant. Penalties could range from immediate de-designation of hedge accounting to retrospective adjustments and restatements of historical financials. The key is to be ready from the start: adhere to the accounting standard, document your strategy and hedged risk(s), and consistently apply the testing methods outlined within your hedge designation documentation.

What happened with the Petrobas case?

Petrobas is a publicly-held company specializing in the oil, natural gas, energy, and petroleum industry headquartered in Rio de Janeiro, Brazil. Due to government-mandated investments, Petrobras is the most indebted major oil firm in the world. These investments stressed the company’s balance sheet. In July of 2013, Petrobras announced changes in the accounting of currency hedging to limit the impact of the Brazilian real on their debt. The hedging methodology used by Petrobas helps remove earnings volatility due to fluctuating foreign exchange rates.

According to an article* published by Thomson Reuters, “The Real's 35 percent decline against the dollar over the past four years led to a sharp rise in the company's foreign liabilities and debt payments, when denominated in local currency terms. Normally a decline in the currency against the dollar would require a company with dollar-denominated debts to record a non-cash, non-operational impairment on results, reducing net profit or increasing a net loss.”

Will you choose a trusted practitioner or risk it alone?

Knowing what’s at stake, would you pursue hedge accounting without independent subject matter expertise? You need to have someone with the knowledge, and experience with hedge accounting and the nuances that come with different industries and hedge types to work directly with auditors and regulators.

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HedgeStar specializes in hedge accounting and derivative valuations. Call us today for a free 30-minute consultation on your hedging program.