Are you ready for IFRS 9?
With the mandatory implementation deadline of 1 January 2018 less than a year away, the impact of IFRS 9 Financial Instruments should not be underestimated. This accounting standard significantly changes the accounting of financial instruments and has substantial implications for corporates and their treasury departments.
Some of these changes directly impact the P&L and balance sheet, making it a CFO priority. Since hedge strategies and overall P&L volatility are affected, IFRS 9 will also be a near-future priority on the Treasurer’s agenda.
Hedge Accounting Changes
IFRS 9 encompass an array of changes that will influence your hedge accounting process in different ways. Cross-currency interest rate swaps (CC-IRS), options, FX forwards and commodity trades are just a few examples of financial instruments which will be affected by the upcoming changes. The time value, forward points and cross-currency basis spread will receive different accounting treatment under IFRS 9.
Impairment & Forward-Looking Provisions
IFRS 9 drastically alters the way businesses should take provisions for credit losses, moving from an incurred loss approach to an expected loss approach. For every financial instrument not at fair value, a provision should be taken at inception. Instruments affected include trade receivables and debt securities. Bank deposits, contract assets and intercompany loans are also affected. The new rules are principle-based and simple. The design and implementation, however, can be challenging, especially regarding the incorporation of forward-looking information in the loss estimate.
IFRS 9 is not the only factor affecting intercompany loans. Upcoming tax regulations such as the Base Erosion Profit Shifting (BEPS) project by the OECD or the Anti-Tax Avoidance Directive (ATAD) by the European Commission are aimed at reducing artificial profit shifting and require arms-length pricing for intercompany loans. A robust, future-proof pricing approach is therefore tantamount. Credit risk, amongst other factors, needs to be appropriately reflected in pricing. The same models can be used to determine the accounting expected loss. At Zanders, we believe an IFRS 9 transition is best accompanied by a review of your intercompany financing methodology to avoid double implementation efforts.
Classification & measurement
Although the changes regarding classification and measurement are less significant, you should definitely be aware of them, especially since the classification will determine whether credit loss provision or full fair value changes will impact your P&L. The classification will depend on both the business model (relating to financial assets) and specific instrument characteristics. Particular challenges arise for instruments with optionalities or profit-sharing characteristics.
Zanders’ Services Offering
IFRS 9 poses challenges, but also offers some clear benefits. Based on our hands-on experience and IFRS 9 expertise, we are able to help you turn this change into a competitive edge for your organization. Unsure where to start? We can assist your company with an impact assessment of the new standard. A full overview of what we can help you achieve can be found here.