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In the first 6 months of 2021, the Turkish Lira depreciated by 18% against the US Dollar and by more than 14% against the Euro. Companies whose balance sheets and dividend calendar were affected by foreign exchange losses started to apply (Hedge Accounting) as a solution.

*** This release is originally published in Turkish.
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ISTANBUL (TR) - The first 6 months of 2021 of financial reporting period once again brought up the measures that should be taken to protect against foreign exchange losses in companies that have foreign exchange risk on their balance sheet. Treasury and financial reporting experts point out that hedging accounting (hedge accounting) should be applied against market risks such as exchange rate changes, interest rate changes, commodity price changes. Hedgeblue co-founder Aras Orhan, who develops software for the reporting units and treasuries of companies and financial institutions, said: “hedgeblue companies may not have experienced losses in cash flow, but the financial reporting results for future foreign exchange risks were almost identical to those of non-hedgeblue companies. This is because this type of company does not yet use hedging accounting. Many large companies in our country have started to implement these practices." 

It reduces the imbalance in long-term profitability

Explaining the scope of the application, Aras Orhan said, “Hedging accounting is an application that reports the forward contracts made by companies to limit their risks in accordance with the Turkish Financial Reporting Standard, TFRS, and clears income-expense statements from temporary volatility. It is a method that affects the periodical profitability of companies and in some cases can also affect their profits before interest and depreciation. Moreover, it has an efficiency that can even bring the dividend yield of the companies earlier. It reduces the imbalance in the long-term profitability of companies that apply it not only in exchange rate changes, but also in situations that are protected against interest and commodity price risks. It can predict results at the end of the reporting period with a lower margin of error. Thus, it is possible to know the approximate effect of the estimates made using the budget rates.”

Which companies can apply Hedging Accounting?

If we give an example from Turkey; Companies that benefit from YEKDEM and EÜAŞ Turkish coal and foreign currency indexed energy sales incentives in the energy sector, that have export revenues in the industrial sector and have debt or raw material import expenses in the same currency, companies that have foreign currency guaranteed income due to public-private cooperation (COD) among the candidates that come to mind first.

Özgür Uzunoğlu, CFO of Akfen Renewable Energy, explains how they benefit from hedge accounting as follows: “We have subject our renewable energy portfolio of 706 MW to hedge accounting. By matching our foreign currency investment debts with our future YEKDEM incomes, which are also in foreign currency, we avoided reporting all unrealized exchange losses as if they were realized. In this way, we have made our income statement close to our operating profitability and realistic.”

Calculates $5 billion hedge position

Aras Orhan drew attention to the fact that hedging accounting is being implemented by an increasing number of companies in Turkey, but due to the complexity of the application and legislation, there is a lack of subject experts; Stating that they offer a solution to this problem with the software they developed as Hedgeblue, he said: “Due to the complexity of the subject, the number of experts in this field is quite low, apart from banks. Companies also cannot fully embody the benefits of hedge accounting by looking at the legislation and cannot take advantage of it. As Hedgeblue, we offer software that optimizes the entire process from creating and monitoring hedge accounting to closing it. Thus, a company can match its future foreign-currency income expectations with the foreign-currency liabilities currently on its balance sheet, thus avoiding a foreign currency loss for the period. The total size of the hedge accounting portfolio, which we have established and followed on behalf of our customers from different sectors, has exceeded $5 billion. Thanks to the software, we have both accelerated the process and prevented calculation errors, and we can pass the results quickly through the financial audit.”

Moving forward to become a global fintech (regtech), Hedgeblue develops software based on mathematical models and algorithms for liquidity, risk management and cash flow management as well as hedge accounting.