What does “Roll Forward” Mean? Definition, Guide, 10+ Facts

Roll forward is the process of extending the expiration or maturity of an option, futures contract, or forward by closing the previous contract and initiating a new contract for the same underlying asset at the then-current market price.

A roll forward allows the trader to continue the position past the initial contract expiration date.

What does “Roll Forward” Mean?

Roll forward has two distinct financial meanings, one pertaining to accounting processes and the other to options contracts. In accounting, this is when historical data on assets and liabilities are used to create a new accounting period’s baseline.

What does "Roll Forward" Mean? 

It entails the closure of an options contract and the opening of a new contract with the same strike price and a later expiration date. Typically, the intended phrase is evident from the context.

For accountants

Using the roll forward, accountants may monitor data over numerous accounting cycles. Several methods exist for moving data from a prior accounting period, such as transferring only the most recent balances or establishing an arbitrary transfer date.

Accountants must utilize a consistent procedure to ensure the accuracy of their records. In addition, they must give information upon request on how they handle accounting data and must comply to all industry norms and practices in all of their operations.

For options traders

This word relates to the retention of a striking price while transferring it to a new date. This may be done for a variety of reasons, including the desire to prolong a contract with advantageous conditions or the necessity to adjust to a shift in the market.

In some instances, it may also be referred to as a rollover, referring to the fact that the trader is packaging the transaction and shifting it to a new time frame.

Traders who wish to employ a roll forward must be able to complete the existing contract and negotiate a satisfactory bargain for the new contract. Traders who do not like to bargain on their own may utilize a broker for this procedure.

Brokers will assess which types of transactions are executable based on the terms established by their clients. As with other financial advisors, they have a duty of care toward their customers and must comply with instructions and manage the monies in their care prudently.

“Rollforward” vs “Roll Forward”

Roll ahead should be written as two separate words, i.e., “roll forward,” or with a hyphen, i.e., “roll-forward.” The distinction between “roll forward” and “rollforward” is that “roll ahead” is used to determine ending balances in accounting, whereas “rollforward” is used to restore a backup copy of a database. These are two entirely separate scopes and ideas.

Roll forward in Accounting vs Investing Options

Accounting roll forwards and investment roll forwards are two distinct concepts. Accounting roll forwards are account ending balances, but investing roll forwards are a formality requiring the closure and subsequent re-opening of options, futures, or forwards contracts to extend the life of the contract.

Roll Forwards on the Balance Sheet vs Income Statement

While each account on the balance sheet has a roll forward value that serves as its subsequent beginning balance, there is only one roll forward value for all P&L accounts.

This roll forward is the total of P&L credits and debits, or net profit, which is transferred to retained profits on the balance sheet (equity). In conjunction with the retained earnings beginning balance, the current net profit becomes the retained earnings beginning balance in the succeeding quarter, and all P&L accounts are reset to zero. This illustration should facilitate comprehension of the concept:

On the P&L

The majority of P&L accounts do not require extensive supporting documentation since they consist of straightforward transactions. A single sale, for instance, requires merely an invoice as supporting paperwork.

If the company operates in an environment where revenue recognition is based on more than just an invoice, such as businesses where digital transactions are aggregated in an IT database that computes exchanges between different currencies, then the roll forward report would include an expanded breakdown of the database’s revenue recognition logic.

On the Balance Sheet

Working capital account transactions may be linked with the complexity of the P&L accounts or left as simple debits and credits. Due to the fact that accounts such as payables and receivables are direct consequences of corporate operations, it is typically sufficient to display the credits and debits on these accounts. However, they should be broken down to the finest degree of specificity.

Fixed Asset Roll Forward

Fixed assets and liabilities, on the other hand, must be supported by exhaustive schedules. All fixed assets should have what is known as corkscrew calculation paperwork, which details the beginning balance, additions, sales, and ending balances. In addition, it displays the depreciation beginning balance, additions, reversals upon sale, and ending balances for every fixed asset.

Roll Forward as a form of Reconciliation

Frequently, the word roll forward is used as a type of reconciliation. Roll forwards without accompanying documentation, while sadly ubiquitous in reality, are not a legitimate form of reconciliation.

The phrase “reconciliation” does not appear in the FASB’s dictionary of accounting terminology, although it is often recognized to include reconciling internal records with those of external sources, typically bank statements.

What does "Roll Forward" Mean?

To qualify as a kind of reconciliation, roll forwards must be accompanied by supporting evidence such as bank statements.

Bank Reconciliation in Roll Forward Reports

Roll forward reports on cash accounts serve as the foundation for bank statement reconciliation. There are few external sources against which to compare internal records, other than bank statements, hence “banks” are the default.

In the instance of roll forward reconciliation, an accountant reconciles all cash ledger transactions with bank statement transactions. If the financial statements balance at the end of the period and all roll forward reports for cash accounts correspond to bank statements, then the accounts are deemed reconciled.

Roll Forward in Audit

Audit roll forwards are extremely similar to accounting roll forwards, with one exception. Roll forwards in audit can refer either to the use of debit and credit activity to reconcile a ledger account with bank statements, or to the use of a client’s documents from the previous year in the current year (the “rolling forward”) by simply changing the dates in order to avoid duplication of effort.

Account Reconciliations Versus Roll-Forwards

Actually, it depends. Do you have established policies and procedures? Is it a dynamic and intricate account? Is it manually reconciled or is an automatic solution utilized?

Google searches for “roll-forwards” in the context of account reconciliation yield several references to the necessity to prevent roll-forwards while reconciling accounts, but few definitions of what a roll-forward is in relation to an account reconciliation.

The greatest comparable I’ve seen is a presentation from the United States Navy. “Ensure that the reconciliation supports the balance and is not simply a repetition of the general ledger or a roll-forward of the balance. Each submission must be validated; you cannot just presume its accuracy. To guarantee accuracy, supporting documentation is necessary.

A roll-forward is merely a log of the account’s transactions. The roll-forward adds all debits and credits (pluses and minuses) that contribute to the current period’s balance. Without support. No comparable. No reconciliation.

How to do “Roll forward”?

A roll forward can be executed with the same strike price for the new contract as the old contract, or a new strike price can be established. If the new contract has a higher strike price than the original contract.

The strategy is referred to as a “roll up,” but if the new contract has a lower strike price, the technique is referred to as a “roll down.” These methods may be utilized to safeguard earnings or hedge against losses.

What does "Roll Forward" Mean?

Consider a trader who holds a June-expiring call option with a $10 strike price on Widget Company. The price per share is $12.

If the trader stays optimistic on Widget Company as the call option nears expiration, they may retain their investing attitude and safeguard gains by selling the June call option or concurrently purchasing a September call option with a $12 strike price.

This “roll up” to a higher strike price will minimize the premium paid for the second option (relative to purchasing a fresh $10 strike call), safeguarding a portion of the initial trade’s gains.

Roll-forward Reports

The importance of roll-forward reports

If leasing activity maintained constant throughout time, it would be straightforward to display amortization of ROU assets and liabilities using schedules that detail asset and liability decreases for each period.

Realistically, a company’s leases and obligations are always changing owing to occurrences such as:

  • New leases or tenancy changes
  • Modifications
  • Impairments
  • Terminations
  • Regular amortization

To meet with the most recent lease accounting requirements, accounting must properly and exhaustively disclose all changes, including lease additions or subtraction and the reasons for the adjustments.

For example: 

  • If a corporation is forced to record a loss on an impaired asset, the lease accounting must include the equivalent drop in the ROU asset.
  • If a corporation receives rent abatements and decides to consider them as remeasurement events rather than variable rent charges, the lease accounting must record the resultant amounts and how and why they were computed.

Roll-forward reports are an efficient mechanism for revealing these and other lease-related changes that occur during the lease’s term.

The advantages of roll-forward reports

Similar to a statement of cash flows, roll-forward reporting reconciles the disparities between the cash position on the balance sheet and the income statement.

A roll-forward report performs the same way, but for leases; it provides visibility into an organization’s lease portfolio, operations, and business choices, including the reasons for additions or subtractions in lease financials.

For example, a report may indicate a substantial shift in liabilities, but also reflect that it is offset by an increase in leasing assets.

In addition, roll-forward reports can be used to separate operational leases from financing leases, as needed by ASC 842 compliance.

The reports can also categorize and report lease information by asset class.

What to include in roll-forward reports

Roll-forward reports detail the fluctuations in your balance sheet from period to period. Consequently, the first step in creating a roll-forward report is to ensure that your lease information is correct, current, and comprehensive.

What does "Roll Forward" Mean?

Frequently, roll-forward reports contain lease information compiled from numerous sources, such as the departments responsible for real estate, office and IT equipment, automobiles, and other assets.

Data collection may also involve specific places in distinct cities, states, regions, or nations.

The information contained in roll-forward reports will vary based on the company’s organizational structure, assets, and accounting and reporting requirements. For instance, you may generate a report for the whole lease portfolio, a single asset, a specific department within the organization, a sub-organization within a multinational firm, or an asset type (such as real estate or equipment).

However, for the report to be genuinely useful, it must explain why lease financials changed, as well as the quantities. Consequently, typical roll-forward reports for a ROU asset or a short- or long-term debt comprise the following:

  • Beginning balance 
  • Additions — including new leases, transitions and modifications 
  • Deductions — including modifications, impairments, terminations and amortizations 
  • Recalculated ending balance — including the mathematical formula 
  • Ending balance comparison for the period 
  • Total liability balance 

The report on the roll-forward should categorize each transaction by asset type and include payments, amortization, and interest. Companies with a classified balance sheet must record both short-term and long-term obligations, including monthly reclassifications or, if payments are not made on a monthly basis, interest accruals.

Why use roll-forward reports?

Roll-forward reports are a crucial tool for both compliance with lease accounting standards and continuing lease visibility. They allow consumers of financial statements to examine lease modifications, their causes, and their effects in a single report.

By using a technology platform that automates roll-forward reporting, firms may speed data collection, computations, and reporting while guaranteeing compliance with regulations.

What does "Roll Forward" Mean?

The industry-leading lease accounting platform from Visual Lease enables roll-forward reporting for improved validation and transparency. The roll-forward report features of the platform offer users with a clear knowledge of lease modifications and their effects on the business.

Users are able to simply access all supporting data and leasing activities directly on the platform. Visual Lease may also automatically distinguish between financing and operating leases for ASC 842 compliance.

Conclusion

Roll forward refers to the extension of a derivatives contract by terminating a contract that is about to expire and starting a new contract at the current market price for the same underlying asset with a future expiration date.

A roll forward can be executed with the same strike price for the new contract as the old contract, or a new strike price can be established.

If the new contract has a higher strike price than the original contract, the strategy is referred to as a “roll up,” but if the new contract has a lower strike price, the technique is referred to as a “roll down.” These methods may be utilized to safeguard earnings or hedge against losses.

FAQ

A roll-forward is just a ledger of activity in the account. The roll-forward rolls the balance from the prior period and adds all the pluses and minuses (debits and credits) that take you to the balance this period.

In accounting, the roll forward is an ending balance for one accounting period that becomes the starting balance in the next period. Explore the definition and examples of fixed asset roll forward, and consider construction equipment to gain understanding.

The Fixed assets roll forward report provides, in an easy-to-read Microsoft Excel format, the detailed fixed asset data that you require for period closing, financial statements, and tax reporting.

This strategy simply involves closing the original position and opening a new position with the same underlying asset and expiration date, but at a lower price. In addition, traders can roll forward a position by keeping the strike price the same while extending to a longer expiration date.
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Pat Moriarty
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