An insight into IFRS 9 changes, including the introduction of new approaches to classifying financial assets and liabilities.
1 January 2018 is not only the starting date for the new revenue standard; the new financial instruments requirements will come in at the same time. We think the opportunities offered by IFRS 9 should not be overlooked.
Much recent focus outside of financial services has been on the forthcoming revenue and leasing standards. And for good reason. They contain some of the most complex and fundamental changes to the way companies will report two of their most important metrics – revenue and debt – in our accounting lifetimes.
But they are not the only changes on the immediate horizon. IFRS 9 will introduce new approaches to classifying financial assets and liabilities, new impairment rules and some new hedge accounting requirements. And it’s
not finished yet: the proposals on macro hedging – of particular interest where portfolios of assets are hedged – are not complete. As a result, many within financial services will continue to apply the existing IAS 39 hedge requirements for a little longer.
If you work in financial services, IFRS 9 has probably dominated your
thinking for some time. You’ll already be familiar with the idea of business model classification and phrases like “solely payments of principal and interest”. And many will already be modelling expected customer behaviour to calculate an IFRS 9-compliant impairment provision.
But for others, what should be your priority? IFRS 9…sounds complicated.
Let’s start back at the beginning. What’s new? Well, as we noted
above, there are three key areas of change: classification, impairment and hedging - the first two are probably not high impact areas for most. If the terms of your receivables are simple and you don’t sell them to collect the cash, then your classifications won’t change – in other words, they will continue to be carried at amortised cost. Complex instruments like interest rate or currency derivatives will still be carried at fair value. On impairment, IFRS 9 introduces the idea of provisions based on expected rather than incurred losses. This is part of the standard-setters response
to the financial crisis and accusations that existing standards led to delayed
recognition of losses. The whys and wherefores of that decision is another topic for another day, but IFRS 9 contains a simplified approach for most short-term trade receivable-type balances that will mean, broadly, you will end up with total “bad debt provisions” pretty close to where you are today.
It’s the third change, to hedge accounting requirements, where new
possibilities arise. We move away from the “bright lines” of the 80:125 limits on hedge effectiveness currently within IAS 39. Hedge accounting and its
effectiveness will be linked to your wider risk management strategy. The economic relationship between the hedging instrument and the hedged item is key.
In plain English? Hedge accounting will be available in places it wasn’t available before, for example allowing you to hedge account for some derivatives used to mitigate commodity price risks, and it won’t be such a mini-industry of documentation and testing as it has been in the past.
So is there an opportunity for you here? It’s probably fair to say hedge accounting is rarely top of the board’s agenda but this is a chance to revisit your approach. Perhaps you could begin hedge accounting in new areas. But it’s rarely as simple as saying “let’s hedge account now”. There
are pros and cons to any decision. Do the costs, such as the additional workload on your team, outweigh the potential benefits? Are you clear what those benefits are?
If you would like to find out a little more about what those benefits might
be for you and how you could access them or if you would like to find out a
little more about financial instruments in plain English please contact Nick Chandler.
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Senior Manager, Accounting Advisory Services, KPMG
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