This company generates over 75% of its sales (totalling around £22bn in its last financial year) outside the UK resulting in large currency exposures which it hedges. Its mix of sales is broadly 20% from each of its US, Chinese, European, UK and other markets. It also hedges commodities such as aluminium, copper and PGMs. The company decided on a cloud-based hedge accounting solution.
Photo of Duncan Karran, Jaguar Land Rover and James Mitchell, Reval.
Jaguar Land Rover is the UK’s largest automotive manufacturing business, built around two iconic British car brands: Land Rover, the world’s leading manufacturer of premium all-terrain vehicles and Jaguar, one of the world’s premier luxury sports saloon and sports car marques. Jaguar Land Rover is transforming its business to realise the full potential of its brands and deliver profitable results. Driving the business is a world-class team of 38,000 people globally. Jaguar Land Rover sold a total of 521,600 vehicles during the year ending 31st March 2016, comprising 427,100 Land Rover vehicles and 94,400 Jaguar vehicles.
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With £22bn of revenue in its last financial year and over 75% of sales diversified across countries outside the UK, Jaguar Land Rover has significant currency exposures. Its FX hedging policy is based around hedging in descending percentages over a five-year time span. As a result of this strategy, Jaguar Land Rover has a relatively large FX hedging portfolio for a corporate.
Jaguar Land Rover also has a commodity hedging programme. The exposures are much smaller than for FX, and Jaguar Land Rover hedges lower percentages over a three-year horizon for aluminium, copper and platinum group metals (PGMs).
The team managed its hedging programme on legacy systems, including spreadsheets, which was seen to be more susceptible to control risks. The critical terms accounting method has been used to perform effectiveness testing, but the desire was to move to a system with scope to implement a more sophisticated effectiveness testing approach. Consequently, Jaguar Land Rover treasury looked for a more dedicated system to manage and account for its portfolio to be best in class.
With such a large hedging programme, Jaguar Land Rover wanted to achieve the following objectives:
Move to a dedicated derivative system to provide better controls and implement and automate new processes.
Implement more sophisticated and flexible effectiveness testing (eg scenario or regression tests).
Improve the ability to add new transaction types and support future reporting or regulatory requirements.
Enable more sophisticated analysis of the hedging transactions and portfolio together with the exposures.
In order to do this, Jaguar Land Rover chose a hedge accounting solution provided by the Reval Cloud Platform. The project was overseen by a cross-functional project steering committee, comprising representatives from treasury, accounting, finance transformation, business assurance, internal audit and IT, and it was supported by Reval and third-party party consultants.
“The Adam Smith awards are recognised by Jaguar Land Rover as having a highly competitive selection process with nominations made for companies around the world. For the team at Jaguar Land Rover to have been selected from such a large pool of applicants reflects the dedication of everyone involved in working to make the project an end to end success.”
A clear project structure was put in place to ensure that:
Clear articulation of the aims of the project and its planned business benefits.
Reporting to the steering committee on performance against timescales, testing progress, ‘car park’ issues and potential project risks.
Key accounting decisions relating to the hedge accounting approach were reviewed and challenged with support from technical accountants to ensure decisions taken several years ago remained current.
The testing strategy was reviewed in full by the consultant giving a high degree of confidence in the accounting result prior to full launch.
Despite time being on everyone’s mind throughout the project, having a broad group overseeing the project ensured that the team did not lose sight of the need for quality.
“Working with Reval, we delivered a robust solution and migrated our entire FX and commodity book within the target five-month timeframe,” says Duncan Karran, Assistant Treasurer at Jaguar Land Rover.
Best practice and innovation
Jaguar Land Rover treasury is committed to the vision of being a world-class function. With its large FX exposures and hedging programme, having best in class technology is a key priority for its hedging activity. The size of the hedge portfolio meant it was critical to carefully plan the implementation with extensive testing to ensure there were no issues that might compromise prior or future accounting. The project was governed by a cross functional Jaguar Land Rover steering committee led by treasury, which set an ambitious target to complete such a major systems project within five months. “The project was completed and the system successfully launched within the scheduled time frame,” recalls Karran.
“While some would argue many of these types of activity are part of the ‘model’ standard for a project, delivering a new system while adhering to a model project approach is always more challenging than planned,” adds Karran.
The key learnings we can share from this project are the importance of ensuring that you have a strong team of motivated people in place when taking on such a major system implementation and also to be clear with every member of the team how important their tasks, however small they may be, are to the overall success of the project.