What will 2018 be remembered for?
03 April 2017
Russia hosting the word cup? A century since the end of World War I? When IFRS 9, the new financial instruments standard, has to be applied?
With 2018 approaching fast, IFRS 9 is rising to the top of the agenda for more companies. Here are my top nine on IFRS 9 for corporates:
- Don’t assume it won’t affect you. IFRS 9 will significantly impact corporates. A corporate is likely to be affected if it hedges, has trade or other receivables, lends to group companies, or has modified/renegotiated its borrowings.
- More assets at fair value. Companies that hold strategic investments or other unquoted equity investments measured at cost today will be find they are measured at fair value. Factored receivables could be measured at fair value. Companies with large investment portfolios will need to consider their business models for holding those investments to determine if fair value is required. Any changes to business models to minimise this impact should be implemented before 2018 when IFRS 9 first applies. New valuation processes might also be needed.
- Larger and more volatile impairment provisions. A ‘day 1’ loss is required on all loans, receivables and debt investments. This includes intra-group loans. Trade receivables will take a ‘double hit’ from discounting under the new revenue standard and booking a ‘day 1’ impairment loss from IFRS 9.
- Liabilities are affected too. Companies that renegotiate borrowings will need to recognise a gain or loss in all cases. They will no longer be able to spread the impact over the remaining life of the debt
- Simple may not be best. The new requirements permit a ‘simplified approach’ for impairment of certain trade and lease receivables that may be easier to apply. However, the approach could result in larger, more volatile impairment provisions for assets with an initial maturity greater than one year. Companies will need to consider the trade off between lower provisions but greater complexity, or simpler calculations with potentially more volatility.
- Hedge accounting should be easier to achieve – but at a cost. The IAS 39 hedge effectiveness ‘bright line’ rule of 80-125% has been removed. There are however, new hedge effectiveness requirements that need to be met. The measurement of hedge ineffectiveness is more complex for some kinds of hedges.
- Some hedges may be more attractive. Some corporates rejected hedging with options under IAS 39 due to the resulting volatility in reported profits. IFRS 9 removes much of this volatility, so companies may wish to revisit their hedging strategies. IFRS 9 also allows hedging a component of a risk as long as it is separately identifiable and reliably measurable. This could be a big plus for companies using commodities in their operating activities.
- New hedging documentation is needed. All companies will need to update hedge documentation – e.g. for the new hedge effectiveness requirements, and the other changes noted above. New documentation needs to be in place by 1 January 2018 (for companies with a 31 December year-end) so don’t leave it too late.
- Systems updates may well be required. For example, when hedging a non-financial asset like inventory, it will be mandatory to adjust the inventory balance for the gain/loss on the derivative. Systems will need to be changed where this treatment wasn’t previously applied.
The implications of IFRS 9 for corporates could be wide ranging. Companies should start planning now to ensure they are prepared for adoption by 2018.
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This week's guest blogger is Sandra Thompson, Global Financial Instruments Leader. Connect with her on LinkedIn here.