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Perspectives on embedding risk management in business processesThis weblog aims to explore how integration of risk management with other functional areas of a business can generate better risk intelligence. Often times, risk management and other functional areas of a business operate in silos. However, it is the author's belief that removing these rigid demarcations between risk management and other business functions can generate better values for companies and lead to new ways of doing things. April 28, 2012 Derivative Accounting: Tools & Techniques for Testing Hedge Effectiveness.This article originally appeared in the Spring/April 2012 Release of RiskJournal magazine. Companies are generally exposed to market, credit, liquidity, counterparty and operational risks in the ordinary course of business. In order to protect themselves from market vagaries however, organizations use derivatives to transfer the risk of changes in market volatilities to third parties. Derivative is a word that frequently evokes deep emotions. In fact, derivatives are often viewed with dark suspicion and despite their intrinsic values and the critical role that they play in facilitating liquidity in the capital market; financial derivatives have been unfairly labeled as "weapons of mass destruction". To add salt to the wound, others have disparagingly referred to them as the "devil's derivatives". Despite their less than stellar reputation in the court of public opinion however, the use of derivatives as risk management tools continues to soar. Advancements in technology, fair value accounting and deregulation, combined with the ingenuity of quantitative minds have resulted in a geometric increase in the use of derivative instruments. This fact, coupled with dense, difficult to interpret derivative accounting standards, exposes the process of recording and reporting derivative transactions to more than its fair share of operational risks, accounting misstatements and restatements and the attendant public relations nightmares. When a company enters into a derivative transaction, it is required to mark the derivative instrument to market. However, marking financial instruments to market and taking changes in the fair value of such instruments into income makes the earnings of a company highly vulnerable to the caprice of market prices. Hedge accounting gives a company latitude on how to treat changes in the fair value of both the derivative instrument and the underlying item. When a company elects to use hedge accounting to record its derivative transactions, it has the freedom to record changes in the fair value of such instruments either in income or in a component of shareholders' equity known as other comprehensive income (OCI). Because of the comparative advantage of using hedge accounting to manage earnings volatility over the flexibility of using speculative accounting to record derivative activities however, the process of recording derivatives transactions under hedge accounting is not a walk in the park. Companies that choose to use hedge accounting to record their transactions are subjected to stringent accounting and documentation requirements. This include a requirement to test the prospective and retrospective effectiveness of the hedging arrangements at every reporting period. This paper thus seeks to shed some light on the tools and techniques available for testing hedge effectiveness under the relevant accounting standards in order to help organizations to properly record and report their derivatives transactions. This article will focus mainly on hedge effectiveness testing methodologies and will not address the entire process of recording derivative transactions from start to finish. Nonetheless, the topics covered will form a strong building block for those interested in further exploring the nuances of derivatives accounting. To read the full article click HERE Posted by Oluwaseyi at 05:22 PM | Comments (0) January 16, 2012 Fair Valuation of Illiquid AssetsThis article originally appeared in the Winter January 2012 Release of RiskJournal magazine. Companies have traditionally reported their financial positions at historical costs; however, current business models and requirements for timely, current and relevant information have played significant roles in effecting changes in financial reporting. Unlike in the years past, corporations now report certain financial and non-financial assets and liabilities at fair market value. Fair value measurements are important components of risk management, economic capital calculations and provide key inputs needed by regulators to carry out their supervisory responsibilities. Fair valuation practices also have accounting implications and influence the business decisions of a wide range of stakeholders. The recent financial crisis and the protracted recession that followed however, are sad reminders that downward swings in macro-economic variables can make hitherto liquid assets difficult to sell. Equally worrisome is the fact that market prices are hard to determine for illiquid and hard-to-value assets. In this paper, we introduce the concept of fair value accounting and briefly explain the accounting guidance on the topic. We then discuss some methodologies for fair valuing illiquid assets and their limitations. Finally, we discuss strategies that companies can use to enhance their fair valuation practices. To read the full article, click HERE Posted by Oluwaseyi at 02:49 AM | Comments (0) November 19, 2011 Business Combination & Risk Management - Part 1In the beginning, corporations were given a very narrow legal mandate. However, as capitalism grew, the legal rights of artificial entities were expanded to mirror those of natural persons. Consequently, corporations acquired the rights to own and be owned, sue and be sued and even engage in activities outside of their charters. No other legal right has corporations exercised more than the right to enter into unions - a recent study by Thomson Reuters indicates that the dollar value of global mergers & acquisitions activities in 2010 surpassed a whopping $2.4 trillion and this number is projected to grow in the coming years as capital market activities resurge. However, bigger is not always better. When poorly executed, mergers and acquisitions can put a company on a perilous journey - sometimes leading to the demise of even the biggest of corporations. Lack of proper planning, management hubris, failure to evaluate the quality of a target's assets, valuation modeling mistakes, inadvertent violation of laws and a lackadaisical attitude on the part of the Board have all lead to business combinations horror stories. While there have been uproars about executive remuneration in recent times, vast more money are wasted on poor acquisitions every year - it is therefore essential to examine business combination from a risk management standpoint. In part one of this paper, we introduce the concept of mergers and acquisition and succinctly discuss successes and failures in business combinations. We also discuss how to develop a sound pre-acquisition strategy. In part two of the paper, we will examine the approaches for designing effective post-merger plans in order to ensure that the combining entities are properly integrated. We will also examine the accounting, regulatory and valuation issues to consider in a merger and acquisition transaction. To read the full article click HERE. Posted by Oluwaseyi at 04:17 AM | Comments (0) November 03, 2011 About Tony AwogaTony is a consultant whose job focus is on accounting, auditing, business Posted by Oluwaseyi at 06:50 AM | Comments (0) |
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