Ørsted implements a more robust hedge accounting practice with expert team from Deloitte
A volatile energy market faced Ørsted with 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.
Dating back to 2011, Ørsted – the global leader in offshore wind power – implemented a two-column income statement. One column with a result that followed the IFRS standard but did not include hedge accounting, and one column with a result that included hedge accounting but wasn’t in compliance with all the requirements in IFRS 9.
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 was robust.
“It typically takes around 5 years to construct an offshore wind farm which then generates revenue – merchant and/or subsidized – 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 program into relatively simple number-stories for our investors,”
René Boel Pedersen,
Director, Head of Financial & Construction Commodity Risk at Ørsted.
“Energy and financial markets are complex, and hedge accounting is also quite complex. So, it’s difficult to find someone who can cover both aspects. But Deloitte flew in deep subject matter experts from London who supported the local Danish experts thereby creating a strong team tailormade for the task. On top of that, they entered with a strong project leader to help steer the process.”
Set the right ambition
In April 2023, Deloitte and Ørsted kicked off the project, and the team initially spent a lot of time scoping it right.
“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 deliverances for Ørsted can be split up in 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. And finally, Deloitte helped Ørsted upgrade process descriptions and formalize 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
"Ørsted might see themself as a pragmatic organization compared to the UK, however for me it was very clear that the team has been prioritizing 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
Internal learning process
The project was delivered on time in December 2023. Today, internal stakeholders know that Ørsted’s financial statement comply with market standards for hedge accounting. For those in Ørsted directly involved in the project, it has been both rewarding and educational, says René Boel Pedersen.
“When we were documenting our practice and describing our processes, we used Deloitte in two different ways. In some cases, we had an initial briefing session with Deloitte, and then they drafted the materials we needed. In other cases, it was the other way around: We made the initial drafts, and then we used Deloitte to review the documents. The latter took more time but was also a great way of getting knowledge deeply rooted in our processes. Which is what you want. But sometimes, when deadlines are tight, it is of importance to move fast and get the project done. We enjoyed the best of both worlds in this project.”
Alex Skjærris agrees and thinks that it was great to learn from international experts. “As Danes, we are very pragmatic in our approach to things. In that regard, it was a good challenge to get an outside-in look on our hedge accounting from the UK, where they are more formal in what they do, and how they do it. We had a good process, and I think we all learned a lot,” he concludes.
Ørsted's lessons learned
- The importance of having clear roles and responsibilities when there are many stakeholders involved – and document these
- Transparency and simplicity build trust
- Do not underestimate the value of having a detailed control description
- Assign a dedicated project manager to large projects so project management does not take resources from the people working on the project
- The importance of having a formalized subject matter lead role in complex projects that understands interdependent workstreams and can make sure that all deliveries are technically in sync
About Ørsted
Ørsted is the global leader in offshore wind power and supplies large-scale and cost-competitive offshore wind energy, onshore wind energy, and solar energy solutions. In parallel, Ørsted operates sustainable bioenergy plants, offers renewable power purchase agreements, and is exploring renewable hydrogen solutions. Ørsted operates across Europe – in the UK, Germany, the Netherlands, Sweden, Poland, and Denmark, where they have their global headquarters – as well as in the US, and in Asia.