Are you aware of IFRS 9?
Last year the International Accounting Standards Board (IASB) published its final version of International Financial Reporting Standards (IFRS) 9. IFRS 9 covers three areas, namely classification and measurement of financial assets and financial liabilities, impairment and hedge accounting.
The new standard will replace IAS 39 Financial Instruments: recognition and measurement. IFRS 9 is effective for annual periods beginning on 1 January 2018. This may seem far away, but we advise corporates to prepare early. Additionally, the standard is available for early application. This may provide an interesting opportunity for treasurers.
There are different reasons for the introduction of IFRS 9. Its predecessor, IAS 39, was widely considered to be complex, rules-based and not always a correct representation of the underlying economic reality. Restrictions under IAS 39 prevented some sound economic hedges from qualifying for hedge accounting treatment. Additionally, there was an intention to achieve convergence between the respective hedge accounting standards in US GAAP and IFRS. Although the IASB has worked closely with the FASB to come to a converged solution, this effort seems to have been unsuccessful.
Many changes in IFRS 9
There are many changes in IFRS 9 compared to IAS 39. In general IFRS 9 is more principles-based compared to IAS 39, which was considered to be more rules-based. The result is a new standard which is more dynamic and flexible.
IFRS 9 also introduces new hedge accounting requirements. The new hedge accounting model aims to improve the reflection of risk management activities in the financial statements. This should enable users of financial statements to better understand the effects of hedging activities. For example IAS 39 allowed components of financial items to be hedged, but not components of non-financial items. In IFRS 9, hedge accounting can be applied on non-financial items such as hedging the oil price component of jet fuel.
New IFRS standard
The new IFRS standard removes the arbitrary 80-125% hedge effectiveness offset rules. It also includes eligibility criteria that are based on an economic assessment of the strength of the hedging relationship.
Can we assist in your IFRS 9 assessment?
IFRS 9 has some clear benefits. When a company enters into derivatives for hedging purposes but hedge accounting cannot be applied, this potentially gives rise to volatility in profit or loss which is inconsistent with the economic reality. Companies and institutions might want to consider looking into the new IFRS 9 standards and the benefits of applying hedge accounting.
For companies that are already familiar with IAS 39, the new standards of IFRS 9 introduce some useful changes. Zanders can assist your company with an assessment of the impact of the new set of rules and the implementation of IFRS 9 as well.