Hedge Accounting
International accounting standard 39 (IAS39) has highlighted the need for reliable valuation techniques for electricity hedge contracts in New Zealand.
Ideally, parties to these contracts would refer to a forward curve from a liquid hedge market to which their contracts could be benchmarked. Even if a reliable forward curve were available, hedgers in New Zealand will still require a valuation adjustment to account for price differences between their off-take or injection nodes and their hedged nodes.
In the absence of a suitable benchmark for ‘mark to market’ valuations, Energy Link has modified its systems to be able to quickly and efficiently prepare valuations based on its electricity price forecasts.
The key attributes of our valuations are that:
- they are based on client’s own weighted average cost of capital;
- the valuations come with a percentile range of values that reflect the uncertainty of future electricity prices;
- they are a cost effective approach to accounting valuations; and
- the valuations come on Energy Link’s letterhead.
Energy Link’s hedge valuations can be used to satisfy auditors when the ‘hedge accounting’ rules are applied to take changes in hedge valuation off balance sheet (and hence remove any effect of these changes until the hedges actually expire.)