In case you missed it, IFRS 9 is here. This accounting standard replaces the now infamous IAS 39, Financial Instruments: Recognition and Measurement, and is effective for years beginning on or after 1 January 2018.
It was designed to respond to criticisms that IAS 39 was too complex, inconsistent with the way entities manage their businesses and risks, and deferred the recognition of credit losses on loans and receivables until too late in the credit cycle.
For many, it’s certainly not less complex and has caused a number of treasurers a few surprises, both good and bad. Some of these include:
IFRS 9 raises the risk that more assets will have to be measured at fair value, with changes in fair value recognised in profit and loss as they arise. The IFRS 9 classification model is simpler, but brings the threat of volatility in profit and loss.
The default measurement under IAS 39 for non‑trading assets was at fair value through other comprehensive income (FVOCI), but under IFRS 9 it’s at fair value through profit and loss (FVPL).
For entities holding instruments other than plain vanilla loans or receivables, or those whose business model for realising financial assets includes selling them (including factoring trade receivables), this will come as a surprise.
The fact that IFRS 9’s classification model is simpler than IAS 39 doesn’t necessarily mean it is simple. Determining whether loans and receivables are sufficiently ‘basic’ in their terms to justify measurement at amortised cost can be challenging.
The only time you can safely assume the classification and measurement of a financial asset always will be the same as IAS 39 is for freestanding non-hedging derivative financial assets, which are, and forever will be, at FVPL.
Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books – even if it is highly likely that the asset will be fully collectable.
This includes trade receivables, lease receivables and, for treasury entities in particular, intercompany loans and bank deposits.
The phrase ‘expected credit loss’ to describe the new impairment model can be confusing, because expected credit losses represent possible outcomes weighted by the probability of their occurrence.
These amounts are not necessarily ‘expected’ nor ‘losses’ – at least as those terms are generally understood.
In all cases, the allowance and any changes to it are recognised by recognising impairment gains and losses in the profit and loss.
…but some fairly onerous new requirements for certain more common strategies.
IFRS 9 allows more exposures to be hedged and establishes new criteria for hedge accounting that are somewhat less complex and more aligned with the way that entities manage their risks than under IAS 39.
Companies that have rejected using hedge accounting in the past because of its complexity – and those wishing to simplify, refine or extend their existing hedge accounting – may find the new hedging requirements more accommodating than those in IAS 39, especially as there are a number of changes to the rules about what can be designated as a hedged item.
The changes primarily remove restrictions that previously prevented some economically rational hedging strategies from qualifying for hedge accounting.
As companies have started to work through some of the new calculations, they have found IFRS 9 more challenging than expected
Some of those likely to be of particular interest to treasurers include allowing: risk components of non-financial items; netted foreign currency exposures; or aggregated items that include a derivative.
It is also much easier to hedge with options.
The devil is in the detail and IFRS 9 certainly has a lot of that. As companies have started to work through some of the new calculations, they have found it more challenging than expected.
For example, IFRS 9 does require the time value of money to be considered in most hedge relationships, and so, for some, taking advantage of a policy choice in IFRS 9 to continue with IAS 39’s hedge accounting rules until the macro hedge accounting rules are available, is an accounting policy choice they feel worth taking for now.
Chris Raftopoulos is a director in PwC’s corporate treasury and commodity trading group and a member of the ACT’s Policy and Technical committee
This article was taken from the Feb/Mar issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership