The FX valuation trap: how to avoid audit issues when hedging

‍There was a time when valuing FX contracts was easy for most mid-sized corporates: a quick call to your bank, a spreadsheet entry, job done. But that era’s gone – and today, independence matters more than ever.

For a growing number of finance leaders, FX valuations are becoming one of the hardest areas to defend at audit – not because the numbers are necessarily wrong (or hopefully not!), but because the process behind them no longer holds up.

Alongside initiatives like the FX Global Code, auditors are raising the bar. Simply pointing to a hedging policy and saying “we followed it” won’t wash anymore. Not if you want to qualify for hedge accounting treatment.

Instead, audit teams want to see how trades were priced, valuations were confirmed, and execution decisions were justified – ideally with documentation and independent validation.

So, where is it going wrong?

When ‘good enough’ no longer cuts it

Valuations (the fair value of your forwards, options, swaps, or large spot positions etc.) directly impact your P&L, balance sheet, and hedge accounting. Conceptually it sounds simple: what is this contract worth today? But in practice, it’s rarely that clear.

Many corporates still rely on valuations from the same banks that sold them the trade. Sure, that’s convenient. But these marks typically lack transparency and any form of external validation.

That’s becoming an audit red flag – especially for structured trades, where the pricing model can’t easily be explained or tested. Increasingly, auditors want to see valuation processes that are:

• Transparent – with clearly documented methodologies (e.g. mark-to-market) based on observable data.
• Independent – not reliant solely on information from the counterparty who executed the trade, or unverified spreadsheets.
• Reproducible – someone outside treasury should be able to follow and recalculate them.
• Compliant – aligned with IFRS 9 for hedge accounting, with clear documentation of how hedging instruments and exposures are linked.

Expectations for more frequent FX valuation checks are also rising – with quarterly marks becoming the bare minimum

Not a burden but an opportunity

While securing independent FX valuations might sound like hard work, it doesn’t have to be (see FAQs table below). And the hidden benefits are significant.

One corporate Bracket analysed saw a $4.7 million swing in monthly FX valuations, with huge variations between instruments and providers. Without independent checks, that kind of movement can slip under the radar until it causes issues at audit.

And when FX valuations lack rigour, it can lead to:

• Reporting delays
• Higher audit fees
• Restatements of earnings
• Loss of board or investor confidence

Of course, independent valuations aren’t just about audit readiness and good governance. They also help treasury teams see issues sooner, optimise decisions, and improve confidence across the wider finance function and leadership.

In short, the biggest trap many fall into with FX valuations is thinking that they’re just numbers. When, in reality, they’re questions – waiting to be asked (and answered).

Independent FX valuations: Treasury FAQs

• Do I need an independent valuation for every FX trade or hedge? No. Start with what’s material – large exposures, complex instruments, or anything with a visible impact on your numbers. Spot-checking can be sufficient to uncover trends.
• ‍Do we need to benchmark daily? Not unless you want to! Daily valuations may become standard for highly structured portfolios, but many corporates begin with monthly or quarterly checks, focusing on transparency and reproducibility.
• ‍Will this help with hedge accounting? Yes. Independent valuations provide stronger, more auditable evidence for effectiveness testing – a key requirement under IFRS 9. This can help prevent restatements and support more stable reporting.
• ‍How do we explain this to the board or audit committee? Many audit committees are already asking, “How do we know this number is fair?” Being able to say, “we independently benchmark our largest exposures and document the methodology” is often enough to inspire confidence.
• ‍Where should we start? Pick one recent FX trade – preferably a larger forward – and run an independent benchmark against it. Comparing that result with what was booked is a great first step.
• ‍How much time or budget does this take? Far less than you might expect. Independent FX valuations can be layered onto existing processes – often without any system changes or significant cost.

[1] https://www.sciencedirect.com/science/article/abs/pii/S027842542400019X

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