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Durchleitung/durchleiten URGENT

English translation: externally offset/external offset

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GLOSSARY ENTRY (DERIVED FROM QUESTION BELOW)
German term or phrase:durchleiten/durchgeleitet/Durchleitung
English translation:externally offset/external offset
Entered by: Hermeneutica
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09:10 Dec 23, 2003
German to English translations [PRO]
Bus/Financial / trading accounting / IAS 39
German term or phrase: Durchleitung/durchleiten URGENT
Still on my IAS 39 swaps and hedges:

Title: Durchleitung des internen Geschäfts

Expression: "an den externen Markt durchleiten"

Specific mention: "dem internen Geschäft kann ein genau passender externer Swap zugeordnet werden (Mikro-Durchleitung).

Another: Bei durchgeleiteten Swaps kann von einer dokumentierbaren Fair Value-Mikro-Hedge-Beziehung nach IAS 39 ausgegangen werden

And so on ... at first, in more isolated contexts, I had simply thought "channelled" [to the external market instead of keeping the transaction as an internal trade] but now I am thinking there must be a more specific term.

Sorry about the hurry but the baby needs to be delivered tomorrow before noon and we just found a 3k word embedded document ... :(

MTIA!

Dee
Hermeneutica
Switzerland
Local time: 15:21
external offset/externally offset
Explanation:
Dee, I haven't given this my usual highest confidence level simply because I've not come across this German term before. I think, though, that what this is referring to at a metalevel is 39.134, which says basically that only an external derivative can be designated as a hedging instrument. Other than that, para. 134 doesn't help us any further, and we have to look at the Implementation Guidance (IAS 39 Q&A), which unfortunately hasn't been translated, nor will it be translated (too expensive, and there's a new IAS 39 out now anyway). Specifically, 134-1, which is rather long, I'm afraid. But maybe it will help with an understanding of the accounting issues involved here.

"Some enterprises use internal derivative contracts (internal hedges) to transfer risk exposures between different companies within a group or divisions within a single legal entity. Does IAS 39.134 prohibit hedge accounting in such cases?

Yes. IAS 39 does not specify how an enterprise should manage its risk, however, it does state that internal hedging transactions do not qualify for hedge accounting. This applies both (1) in consolidation for intra-group hedging transactions, and (2) in consolidation and in the separate financial statements of a legal entity for intra-company hedging transactions. The principles of preparing consolidated financial statements require “intragroup balances and intragroup transactions and resulting unrealised profits to be eliminated in full” (IAS 27.17).
On the other hand, an intra-group hedging transaction may be designated as a hedge in the separate financial statements of a group company, since the intra-group transaction is an external transaction from the perspective of the group company. In addition, if the internal contract is offset with an external party the external contract may be considered to be the hedging instrument and the hedging relationship may qualify for hedge accounting.
The following summarises the application of IAS 39 to internal hedging transactions:
• IAS 39 does not preclude an enterprise from using internal derivative contracts for risk management purposes and it does not preclude internal derivatives from being accumulated at the treasury level or some other central location so that risk can be managed on an enterprise-wide basis or at some higher level than the separate legal entity or division.
• Internal derivative contracts between two separate entities within a consolidated group can qualify for hedge accounting by those entities in their separate financial statements, even though the internal contracts are not offset by derivative contracts with an external party to the consolidated group.
• Internal derivative contracts between two separate divisions within the same legal entity can qualify for hedge accounting in the separate financial statements of that legal entity only if those contracts are offset by derivative contracts with a party external to the legal entity.
• Internal derivative contracts between separate divisions within the same legal entity and between separate entities within the consolidated group can qualify for hedge accounting in the consolidated financial statements only if the internal contracts are offset by derivative contracts with an external party to the consolidated group.
• If the internal derivative contracts are not offset by derivative contracts with external parties, the use of hedge accounting by group companies and divisions using internal contracts must be reversed in consolidation.
To illustrate: The banking division of Bank A enters into an internal interest rate swap with the trading division of the same bank. The purpose is to hedge the interest rate risk exposure of a loan (or group of similar loans) in the loan portfolio. Under the swap, the banking division pays fixed interest payments to the trading division and receives variable interest rate payments in return.
If a hedging instrument is not acquired from an external party, IAS 39 does not allow hedge accounting treatment for the hedging transaction undertaken by the banking and trading divisions. IAS 39.134 indicates that only derivatives that involve a party external to the enterprise can be designated as hedging instruments and, further, that any gains or losses on intra-group or intra-company transactions should be eliminated on consolidation. Therefore, transactions between different divisions within Bank A do not qualify for hedge accounting treatment in the financial statements of Bank A. Similarly, transactions between different companies within a group do not qualify for hedge accounting treatment on consolidation.
However, if in addition to the internal swap in the above example the trading division enters into an interest rate swap or other contract with an external party that offsets the exposure hedged in the internal swap, hedge accounting is permitted under IAS 39. For the purposes of IAS 39, the hedged item is the loan (or group of similar loans) in the banking division and the hedging instrument is the external interest rate swap or other contract.
The trading division may aggregate several internal swaps or portions thereof that are not offsetting each other and enter into a single third party derivative contract that offsets the aggregate exposure. Under IAS 39, such external hedging transactions may qualify for hedge accounting treatment provided that the hedged items in the banking division are identified and the other conditions for hedge accounting are met. It should be noted, however, that IAS 39.127 does not permit hedge accounting treatment for held-to-maturity investments if the hedged risk is the exposure to interest rate changes."

A couple of comments of my own: 1) "separate financial statements" here are simply single-entity FS, not the new-style separate financial statements as defined by the amended IAS 1, 27, 28 and 31.
2) for your first phrase, this would give "offset on the external market". Perhaps "offset with an external party" would be more appropriate here. 3) for Mikro-Durchleitung, I'd say "externally offset micro-hedge". 4) For the "another" sentence, I'd say "A documented fair value micro-hedging relationship under IAS 39 can be assumed for externally offset swaps".

But: this all presupposes that I'm on the right track, and I may be totally, totally wrong. Have a peaceful holiday.


--------------------------------------------------
Note added at 2 hrs 24 mins (2003-12-23 11:34:38 GMT)
--------------------------------------------------

And for the title: External offset of internal transactions.

Of course, what 134-1 tells us is that \"external\" can also be another group company under certain circumstances, it doesn\'t necessarily have to be a non-Group third party.
Selected response from:

RobinB
Germany
Local time: 15:21
Grading comment
Thank you so much Robin! And also Ralph for being at the ready with the various questions this whole thing kept generating. Happy New Year to you both!

Dee
4 KudoZ points were awarded for this answer

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Summary of answers provided
3 +1external offset/externally offsetRobinB
4pass-through
Ralf Lemster


  

Answers


45 mins   confidence: Answerer confidence 4/5Answerer confidence 4/5
pass-through


Explanation:
I'm not aware of any specific mention of this in IAS39, but the standard market terminology I know for this kind of transaction is a "pass-through" transaction.

Maybe Robin has a better idea in an accounting context...?

Ralf Lemster
Germany
Local time: 15:21
Native speaker of: German
PRO pts in pair: 2684

Peer comments on this answer (and responses from the answerer)
neutral  RobinB: Ralf, I'd agree with you entirely for a market transaction, but I'm not convinced that this is appropriate for accounting. See my own attempt, and feel free to disagree! And then maybe we should all take a break?
1 hr
  -> Love to, but....
Login to enter a peer comment (or grade)

2 hrs   confidence: Answerer confidence 3/5Answerer confidence 3/5 peer agreement (net): +1
external offset/externally offset


Explanation:
Dee, I haven't given this my usual highest confidence level simply because I've not come across this German term before. I think, though, that what this is referring to at a metalevel is 39.134, which says basically that only an external derivative can be designated as a hedging instrument. Other than that, para. 134 doesn't help us any further, and we have to look at the Implementation Guidance (IAS 39 Q&A), which unfortunately hasn't been translated, nor will it be translated (too expensive, and there's a new IAS 39 out now anyway). Specifically, 134-1, which is rather long, I'm afraid. But maybe it will help with an understanding of the accounting issues involved here.

"Some enterprises use internal derivative contracts (internal hedges) to transfer risk exposures between different companies within a group or divisions within a single legal entity. Does IAS 39.134 prohibit hedge accounting in such cases?

Yes. IAS 39 does not specify how an enterprise should manage its risk, however, it does state that internal hedging transactions do not qualify for hedge accounting. This applies both (1) in consolidation for intra-group hedging transactions, and (2) in consolidation and in the separate financial statements of a legal entity for intra-company hedging transactions. The principles of preparing consolidated financial statements require “intragroup balances and intragroup transactions and resulting unrealised profits to be eliminated in full” (IAS 27.17).
On the other hand, an intra-group hedging transaction may be designated as a hedge in the separate financial statements of a group company, since the intra-group transaction is an external transaction from the perspective of the group company. In addition, if the internal contract is offset with an external party the external contract may be considered to be the hedging instrument and the hedging relationship may qualify for hedge accounting.
The following summarises the application of IAS 39 to internal hedging transactions:
• IAS 39 does not preclude an enterprise from using internal derivative contracts for risk management purposes and it does not preclude internal derivatives from being accumulated at the treasury level or some other central location so that risk can be managed on an enterprise-wide basis or at some higher level than the separate legal entity or division.
• Internal derivative contracts between two separate entities within a consolidated group can qualify for hedge accounting by those entities in their separate financial statements, even though the internal contracts are not offset by derivative contracts with an external party to the consolidated group.
• Internal derivative contracts between two separate divisions within the same legal entity can qualify for hedge accounting in the separate financial statements of that legal entity only if those contracts are offset by derivative contracts with a party external to the legal entity.
• Internal derivative contracts between separate divisions within the same legal entity and between separate entities within the consolidated group can qualify for hedge accounting in the consolidated financial statements only if the internal contracts are offset by derivative contracts with an external party to the consolidated group.
• If the internal derivative contracts are not offset by derivative contracts with external parties, the use of hedge accounting by group companies and divisions using internal contracts must be reversed in consolidation.
To illustrate: The banking division of Bank A enters into an internal interest rate swap with the trading division of the same bank. The purpose is to hedge the interest rate risk exposure of a loan (or group of similar loans) in the loan portfolio. Under the swap, the banking division pays fixed interest payments to the trading division and receives variable interest rate payments in return.
If a hedging instrument is not acquired from an external party, IAS 39 does not allow hedge accounting treatment for the hedging transaction undertaken by the banking and trading divisions. IAS 39.134 indicates that only derivatives that involve a party external to the enterprise can be designated as hedging instruments and, further, that any gains or losses on intra-group or intra-company transactions should be eliminated on consolidation. Therefore, transactions between different divisions within Bank A do not qualify for hedge accounting treatment in the financial statements of Bank A. Similarly, transactions between different companies within a group do not qualify for hedge accounting treatment on consolidation.
However, if in addition to the internal swap in the above example the trading division enters into an interest rate swap or other contract with an external party that offsets the exposure hedged in the internal swap, hedge accounting is permitted under IAS 39. For the purposes of IAS 39, the hedged item is the loan (or group of similar loans) in the banking division and the hedging instrument is the external interest rate swap or other contract.
The trading division may aggregate several internal swaps or portions thereof that are not offsetting each other and enter into a single third party derivative contract that offsets the aggregate exposure. Under IAS 39, such external hedging transactions may qualify for hedge accounting treatment provided that the hedged items in the banking division are identified and the other conditions for hedge accounting are met. It should be noted, however, that IAS 39.127 does not permit hedge accounting treatment for held-to-maturity investments if the hedged risk is the exposure to interest rate changes."

A couple of comments of my own: 1) "separate financial statements" here are simply single-entity FS, not the new-style separate financial statements as defined by the amended IAS 1, 27, 28 and 31.
2) for your first phrase, this would give "offset on the external market". Perhaps "offset with an external party" would be more appropriate here. 3) for Mikro-Durchleitung, I'd say "externally offset micro-hedge". 4) For the "another" sentence, I'd say "A documented fair value micro-hedging relationship under IAS 39 can be assumed for externally offset swaps".

But: this all presupposes that I'm on the right track, and I may be totally, totally wrong. Have a peaceful holiday.


--------------------------------------------------
Note added at 2 hrs 24 mins (2003-12-23 11:34:38 GMT)
--------------------------------------------------

And for the title: External offset of internal transactions.

Of course, what 134-1 tells us is that \"external\" can also be another group company under certain circumstances, it doesn\'t necessarily have to be a non-Group third party.

RobinB
Germany
Local time: 15:21
Native speaker of: Native in EnglishEnglish
PRO pts in pair: 1929
Grading comment
Thank you so much Robin! And also Ralph for being at the ready with the various questions this whole thing kept generating. Happy New Year to you both!

Dee

Peer comments on this answer (and responses from the answerer)
agree  Ralf Lemster: Guess this hits the nail on the head
1 hr
  -> Surely you're going to take at least a couple of days off? No biking in the snow?
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