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German Corporate Set To Trim Derivatives Use

12 Feb 2001

Rheinmetal, a German-based aerospace, defense, and automobile technology company, is preparing to cut its derivatives use soon as it adopts International Accounting Standards (IAS). Matthias Schoof, head of the treasury and finance department in Munich, said it uses barrier swaptions to hedge interest-rate risk from floating-rate liabilities but fears it will have to stop this when it adopts the IAS this year.

The floating-rate liabilities typically have maturities of less than five years. Schoof declined comment on the size of the loan book. At the moment Rheinmetal uses the German Handelsgesetzbuch (HGB) accounting standards.

Jürg Hashagen, partner and head of financial risk management at KPMG in Frankfurt, said in his experience almost every German company that has switched to IAS is considering switching from option-based hedging strategies to forward-based hedging strategies.

Under the new accounting standards derivatives have to be marked to market which can increase a company's earnings volatility. For example, if a company's assets increase in value and the hedge loses value, the loss is reflected in the company's income statement.

Schoof said Rheinmetal will have to switch to the new accounting standards in a few years but it has decided to make the switch early because IAS is recognized as the best practice. It did not make the switch earlier because its team of three treasury personnel were working on other projects, such as preparing for Y2K.

Peter Clark, senior research manager at the International Accounting Standards Committee in London, said the European Commission has proposed that all listed European Union companies be required to adopt IAS by 2005. This proposal is widely expected to be adopted, he added.

12 Feb 2001