Ørsted implements hedge accounting practice to ensure compliance and transparency
A volatile energy market left Ørsted facing both accounting and risk management challenges. To solidify their hedge accounting practice and the underlying documentation, Ørsted brought in expert help from Deloitte. Today, Ørsted’s financial practice complies with market standards and provides investors with a transparent and easy-to-understand income statement.
Ørsted – the global leader in offshore wind power – needed to provide more transparent accounting to its investors to comply with IFRS standards. In 2019, Ørsted appointed an internal team consisting of representatives from model development, risk, and finance and asked them to implement IFRS hedge accounting and thus eliminate the need for two income statements. The team successfully implemented hedge accounting in January 2021, including the development of an integrated model supporting this.
However, in 2022, the model was severely stress-tested when Russia invaded Ukraine. Energy prices quickly sky-rocketed and heavily influenced Ørsted’s risk management activities, and therefore also the company’s new hedge accounting practice. As a security measure, Ørsted decided to contact Deloitte for expert guidance and to make sure that their model and its underlying processes and documentation were robust.
“It typically takes around five years to construct an offshore wind farm which then generates revenue – merchant and/or subsidised – for a period of 30 to 35 years. This leads to significant risks towards changes in, for example, power prices, steel prices, currency, inflation, and interest rates which we actively manage. IFRS hedge accounting allows us to translate our substantial hedging programme into relatively simple number stories for our investors,”
René Boel Pedersen,
Director, Head of Financial & Construction Commodity Risk at Ørsted.
Set the right ambition
In April 2023, Deloitte and Ørsted kicked off the project, and the team initially spent a lot of time ensuring the scope was correct.
“Our mandate came from the Audit & Risk Committee with a steering committee consisting of our Head of Group Finance, our Head of Risk Management, and the Head of Trading & Revenue Finance supporting the process. It was important for us to set the right ambition for the project because that ambition dictates the number of resources, priorities, deadlines, and so on. From those initial meetings, Deloitte helped us formulate an ambition and create a story that made it clear what we wanted to achieve,”
Alex Skjærris,
Senior Lead IFRS Specialist at Ørsted.
Deloitte’s deliverables to Ørsted can be split up into three categories: First, the subject matter experts took a thorough look at Ørsted’s model for hedge accounting to make sure it worked in compliance with the IFRS 9 standard, and that Ørsted had interpreted the definitions in the standard correctly. It did, and they had. Second, Deloitte helped Ørsted upgrade documentation material that proved that Ørsted worked in compliance with the IFRS 9 requirements. Finally, Deloitte helped Ørsted upgrade process descriptions and formalise controls to reduce the risk of errors and omissions.
“It is not because our previous hedge accounting practice was full of mistakes,” says Alex Skjærris. “But our approach had not kept up with the huge increase in market value we saw during the energy crunch that followed shortly after the implementation, and which, in some cases, relied on specific people performing specific tasks. With the help from Deloitte, we have now set up controls that are less people dependent, and we have a stronger governance structure in place that verifies our practice.”
Alex Skjærris,
Senior Lead IFRS Specialist at Ørsted.
The project was delivered on time in December 2023. Today, internal stakeholders know that Ørsted’s financial statements comply with market standards for hedge accounting.
"It was very clear that the team has been prioritising building an automated process, and therefore ended up with a world-class system that can handle the hedge accounting life outside of the trade capture system, enabling them to separate proprietary trades from the trades used for hedging.”
Thomas Hjøllund Simonsen,
Partner, Financial Instrument Accounting expert from Deloitte Denmark