Hedge accounting requirements in recently adopted international accounting standards are making their presence felt as gold miner Croesus Mining revealed a forecast $18 million half year hedge loss last week.
Hedge accounting requirements in recently adopted international accounting standards are making their presence felt as gold miner Croesus Mining revealed a forecast $18 million half year hedge loss last week.
But according to senior accounting and finance lecturer Ann Tarca at the University of Western Australia, the standards are better than the alternative of Croesus’ former counterpart Sons of Gwalia, which collapsed on an undisclosed inflated hedge book.
In an update on its business outlook for the first half of this financial year to the stock exchange, Croesus last week exposed the mark-to-market loss on its hedge books.
“The recent strong Australian dollar gold price has resulted in the mark-to-market position of the Croesus hedge book increasing to $23 million,” Croesus managing director Michael Fowler told the Australian Stock Exchange.
When a financial instrument is marked-to-market, its market value is recognised in accounting statements rather than its book or cost value.
Introduced in January, the new hedge accounting standards require companies to recognise financial derivative instruments on their income statement if they do not qualify as an effective hedge, when previously they were placed on the balance sheet.
Under the standards, a satisfactory demonstration of hedge effectiveness determines whether a company is allowed to use hedge accounting, which affects earnings to a lesser extent.
Croesus has not adopted hedge accounting on its hedging contracts.
As of June 30, Croesus had hedged 21 per cent of its revenues with 128,750 ounces at $578 an ounce. It had 60,000 call options at a strike price of $613 expiring between December 2005 and June 2006.
Compounding Croesus’ woes, an additional $10 million operating loss prompted it to forecast a pre-tax loss for the half year to December 31 of around $28 million in the face of the historically high gold price.
Overseeing a more successful hedging policy at Consolidated Minerals, incoming Croesus chairman Michael Kiernan presided over ConsMin’s entry into a comprehensive three-year rolling currency hedge program in 2003, under which 85 per cent of its US dollar revenues were locked in at US 56 cents for the first year.
Mrs Tarca said the Sons of Gwalia collapse had occurred because investors were unaware of the company’s hedge position and the new standards created a greater level of accountability at the CFO level.
Sons of Gwalia went into shock receivership after massive blowouts in its hedge position meant it could no longer meet payments on its forward bullion contracts.
But Mrs Tarca said smaller companies remained susceptible under the new standards, “because accounting costs” could deter them from adopting necessary changes.
Other miners to fall foul of hedging contracts include Western Metals, which failed in July 2003 and former zinc miner Pasminco.
