Hedging and documenting a hedge aren't the same thing
A forward taken out to lock in the price of a payment hedges it from the day it's signed, even if nobody has documented it. That's the economic hedge, and in FLIQO it's declared separately: what the derivative was taken out for and which payments it covers.
Hedge accounting is a separate decision. It lets the result of the derivative and the result of what it protects be recognized together, but it requires designating the relationship, documenting it and showing every period that it still qualifies. Without that evidence, the derivative goes through profit or loss on its own and the volatility lands where it shouldn't.
Designating the relationship
A relationship is designated with its type, which decides where the effective portion goes:
- Cash flow hedge: protects what a flow that hasn't happened yet is going to cost. The effective portion is deferred in equity.
- Fair value hedge: protects the value of something already on the balance sheet. It goes to profit or loss alongside the change in the hedged item.
- Hedge of a net investment in a foreign operation: protects the value of a subsidiary that reports in another currency.
The hedged item can be one of the company's own bond issues, a loan agreement or a highly probable forecast transaction. A single derivative can hedge several items, with a portion designated to each, as long as the portions don't add up to more than the whole. FLIQO warns you if the designation comes after the trade date, because hedge accounting can't be applied retroactively.
Testing effectiveness
The test compares the contract with what it hedges, either by matching critical terms or by offsetting values. For the second, FLIQO builds a hypothetical derivative from the terms of the hedged item and measures it with the same method and the same curves as the real one. Measuring each side with a different yardstick would create ineffectiveness that isn't there.
What decides whether the relationship qualifies isn't a percentage. It's the three conditions of the current standard: an economic relationship exists, credit risk doesn't dominate, and the designated ratio is the one actually used. A person answers them at each test. The 80–125% range belonged to the previous standard; FLIQO calculates the offset as a diagnostic and, if your company declares internal ranges, highlights figures that fall outside them.
Rebalancing or discontinuing
When the ratio no longer reflects what's actually used, the right move is to rebalance: the relationship carries on, with the old ratio, the new one and its effective date on record. Discontinuing and redesignating isn't the same thing and gets different treatment, so they're two separate actions. When a relationship is discontinued, the reason is recorded, because it determines what happens to the amount deferred so far.
In a cash flow hedge, if the hedged item ends up as a non-financial asset, such as inventory or equipment, the deferred amount goes into that asset's cost instead of being recycled to profit or loss. That condition is declared and the test reflects it.
What accounting receives
Each test delivers the split the journal entry needs: the effective portion, the ineffective portion and the contract's value at the date, each labeled with its accounting concept and where it's recognized. The equity reserve and the entry itself live in your accounting system, where the chart of accounts and the close are.
Ask Aria
You can ask Aria which hedges are designated, which still qualify, which have a test pending, or which derivatives in the portfolio aren't designated at all.
Frequently asked questions
Does FLIQO post the journal entry?
No. FLIQO runs and documents the test and provides the figures. The entry and the reserve live in your accounting system.
Does it use the 80–125% range?
Not as a criterion. The current standard removed it. FLIQO can show it as a diagnostic against the internal ranges your company declares.
Can a transaction that hasn't happened yet be hedged?
Yes, if it's highly probable. Whoever designates it states how much, in which currency and when, and the hypothetical derivative is built from that.
Can one derivative hedge several items?
Yes. A portion is designated to each relationship, and the system tells you how much is left.