Impact Analysis of IFRS 9, November Update

Chatham Financial White Papers – November 2017



Upon submitting the form, you will be directed to the content you requested.

 

Companies adopting IFRSs have historically been applying the hedge accounting provisions under IAS 39 – Financial Instruments: Recognition and Measurement which was issued back in 2001. However, many companies felt that IAS 39 was difficult to apply due to some of its onerous provisions. Some of these include restrictions on the types of hedging relationships that can qualify for hedge accounting and the need to perform periodic quantitative effectiveness assessments that evaluate how well the hedge has performed at hedging the designated risk. The IASB heard the criticisms of IAS 39 and drafted a new standard, IFRS 9 published in November 2013, which includes provisions that are aimed at simplifying the application of hedge accounting and bringing it more in line with a company’s risk management activities. Companies applying IFRSs issued by the IASB or IFRSs endorsed by the EU have a mandatory effective date for IFRS 9 for periods beginning on or after 1 January 2018 though they have the choice of deferring the application of the hedge accounting provisions contained in Chapter 6 of IFRS 9 until the IASB finalises its macro hedging project. This bulletin provides practical insight to help companies evaluate the impact of adopting Chapter 6 of IFRS 9. The transition provisions for those companies adopting Chapter 6 of IFRS 9 will be discussed in the last bulletin of this series.

 
 
 
 
 
 
 
 

Hedge Accounting Transition Provisions upon Adoption of IFRS 9

 

October 2017



Upon submitting the form, you will be directed to the content you requested.

 

Entities are required to adopt IFRS 9 for annual periods beginning on or after 1 January 2018 although early application is permitted. However, in relation to hedge accounting, entities have an accounting policy choice to ignore the hedge accounting provisions contained in Chapter 6 of IFRS 9 and continue applying the hedge accounting requirements of IAS 39 to all hedges. It is expected that this accounting policy choice will be removed once the IASB has completed its macro hedging project. Entities will have the ability to subsequently adopt the hedge accounting provisions of IFRS 9 after their initial adoption of IFRS 9 but would not be able to switch back to the IAS 39 hedge accounting provisions once IFRS 9 hedge accounting provisions have been adopted. The paragraphs below summarise the transition provisions for entities adopting Chapter 6 of IFRS 9.

 
 
 
 
 
 
 

The Impact of Adopting IFRS 9 on Effectiveness Testing, Ineffectiveness Measurement, and Rebalancing

 

October 2017



Upon submitting the form, you will be directed to the content you requested.

 

Some of the most challenging elements of maintaining a hedging relationship under IAS 39 include complying with the periodic effectiveness testing requirements and properly measuring hedge ineffectiveness. Performing effectiveness testing often requires the use of complex quantitative analysis like statistical regression. Calculating the fair values of the derivatives and hedged items to be used in both the effectiveness testing and the measurement of hedge ineffectiveness often requires the use of sophisticated valuation models. Determining the appropriate methodology to value derivatives and the related hedged items represents another complex area for companies to navigate. The IASB attempted to simplify much of this with changes made to effectiveness testing in IFRS 9, which we will explore in this section.

 
 
 
 
 
 
 

Improved accounting for time value of options and other costs of hedging

 

October 2017



Upon submitting the form, you will be directed to the content you requested.

 

IFRS 9 introduces several new concepts to the area of hedge accounting. One of these new concepts is “costs of hedging.” This new idea is intended to bring relief to companies that use options and forwards to hedge certain financial exposures. The costs of hedging will likely introduce some added benefit for companies seeking to use options, but may also create additional complexity around using cross-currency swap products.

 
 
 
 
 
 
 

New hedge accounting strategies and opportunities under IFRS 9

 

October 2017



Upon submitting the form, you will be directed to the content you requested.

 

Potentially one of the greatest benefits from the new hedging standard is the added flexibility related to identifying the hedged item and corresponding hedged risk in a hedging relationship. The new guidance essentially broadens the universe of risks that are permissible to be hedged, making it more likely that corporate treasury groups will be able to economically hedge their risk exposures and obtain hedge accounting treatment for derivatives used to hedge such exposures.

 
 
 
 
 
 
 

Initial considerations before applying Hedge Accounting under IFRS 9

 

September 2017

 


Upon submitting the form, you will be directed to the content you requested.

 

Companies adopting IFRSs have historically been applying the hedge accounting provisions under IAS 39 – Financial Instruments: Recognition and Measurement which was issued back in 2001. However, many companies felt that IAS 39 was difficult to apply due to some of its onerous provisions. Some of these include restrictions on the types of hedging relationships that can qualify for hedge accounting and the need to perform periodic quantitative effectiveness assessments that evaluate how well the hedge has performed at hedging the designated risk. The IASB heard the criticisms of IAS 39 and drafted a new standard, IFRS 9 published in November 2013, which includes provisions that are aimed at simplifying the application of hedge accounting and bringing it more in line with a company’s risk management activities.

 

Impact Analysis of IFRS 9: Assessment of the Impact of the IFRS 9 Standard on Hedge Accounting

Chatham Financial White Papers – June 2017

 

Companies adopting IFRSs have historically been applying the hedge accounting provisions under IAS 39 – Financial Instruments: Recognition and Measurement which was issued back in 2001. However, many companies felt that IAS 39 was difficult to apply due to some of its onerous provisions. Some of these include restrictions on the types of hedging relationships that can qualify for hedge accounting and the need to perform periodic quantitative effectiveness assessments that evaluate how well the hedge has performed at hedging the intended risk. The IASB heard the criticisms of IAS 39 and drafted a new standard, IFRS 9, which includes provisions that are aimed at simplifying the application of hedge accounting and bringing it more in line with a company’s risk management activities. The hedge accounting provisions in IFRS 9 were published in November 2013, and companies need to assess its impact on
their hedging programs, including what changes, if any, they will need to make in order to apply the new standard. Companies adopting IFRSs issued by the IASB or IFRSs endorsed by the EU will have a mandatory effective date of IFRS 9 beginning 1 January 2018 and have the choice of either early adopting the standard, if permitted in their jurisdiction, or waiting until the mandatory effective date in 2018. This whitepaper provides practical insight to help companies evaluate the impact of adopting IFRS 9 and assist them with evaluating whether early adopting the standard is a wise decision.

 

Download the White Paper
 

Quantifying Currency Basis and Applying Hedge Accounting for Cross Currency Swaps under IFRS 9

Chatham Financial White Papers – February 2017

 

Cross currency (xccy) swaps are financial instruments often used by multinational companies to manage various combinations of currency risks and interest rate risks faced by their global businesses. A xccy swap most typically would be used to hedge fixed or floating rate debt issued in a foreign currency, as it involves the exchange of principal and interest payments in one currency for principal and interest payments of another currency. Economically, xccy swaps synthetically convert foreign debt to local debt, which can be beneficial when borrowing in foreign capital markets is more attractive than issuing local debt. Xccy swaps can also help mitigate mismatches between revenues and debt obligations by allowing the debt obligations to be serviced in the same currency as revenue receipts.
 
Xccy swaps exhibit substantial volatility in their fair values as a result of changes in spot FX rates and interest rate differentials of the different currencies during their terms. A less well-known contributor to this volatility is the “cross currency basis” or simply “currency basis,” which is a premium charged by market participants for funding in one currency relative to another currency over a period of time. Given that xccy swaps are classified as “derivatives” under IFRS, they must be measured at fair value and recorded on the balance sheet with changes in their fair values potentially being recorded in P&L. Fortunately, companies applying IFRS can elect to apply hedge accounting under IAS 39 – Financial Instruments: Recognition and Measurement for qualifying xccy swaps, which matches gains and losses on the derivative with the gains and losses of the exposures being hedged (i.e. the underlying debt), thereby minimising the potential P&L volatility from xccy swaps.

 

Download the White Paper
 

 

Impact of Margin Rules for OTC Derivatives on Fund Risk Management

April 20, 2016 | 1PM ET | 1 hour | Online | by Chatham Financial | Recording Available

 

The upcoming margin rules for over the counter (OTC) derivatives, which are arguably the most significant of the derivative risk mitigation rules to be implemented since the financial crisis, require certain entities to exchange collateral in respect of their uncleared OTC derivatives. Under these new rules, private equity, real estate, infrastructure and microfinance funds may face substantial new requirements. These may include having to:
– Set aside capital to fully collateralize their transactions
– Manage the daily operational processes of posting and collecting collateral
– Implement appropriate policies and procedures to comply with the new requirements
– Amend trading and regulatory documentation
Firms that use derivatives for hedging purposes will have to consider whether and if so how, these obligations affect their hedging strategies.In partnership with ANREV, Chatham will host this webinar with a goal to educate and provide practical insight around the impact and critical considerations for funds operating in the APAC region whose hedging strategies are affected by these new requirements.


Upon submitting the form, you will receive an email with the content you requested within 1 business day.

In this webinar, Chatham will cover the following learning objectives:
– Understand how the margin rules for OTC derivatives impact funds’ interest rate, foreign currency and commodity risk management
– Explore the common misperceptions of the impact of margin requirements
– Consider different scenarios of how the margin rules may impact fund risk management decision making

 

Speakers:
Matt Hoffman is Chatham’s Global Head of Regulatory and Compliance Solutions for financial sponsors, primarily advising private equity, real estate, infrastructure, and microfinance fund sponsors and portfolio companies with regard to compliance with applicable global derivatives regulation, including the Dodd-Frank Act, EMIR, AIFMD, and MiFID/MiFIR, and negotiating ISDA Agreements. Matt has specialized in derivatives regulation since its inception and previously led Chatham’s global corporate team’s regulatory compliance efforts. Prior to that, he was an associate attorney with Duane Morris LLP, specializing in business reorganization and financial restructuring. Matt is a cum laude graduate of Brandeis University, where he earned a BA in Economics, and holds a JD from Columbia Law School, where he received the Outstanding Student Award from the Clinical Legal Education Association.

 

Joseph KusJoseph Kus is the director of Chatham’s Global Regulatory and Compliance Solutions team in Europe, where he advises European and Asian private equity, real estate, infrastructure, microfinance and corporate clients on compliance with global derivatives regulations. Joseph has over fifteen years’ experience of advising on derivatives and fund regulation. His expertise includes working on the implementation of new regulations such as Dodd Frank, EMIR, AIFMD and UCITS, establishment of fund complexes and negotiating counterparty and trading documentation. Following the collapse of Lehman Bros in 2008, Joseph was extensively involved in the resolution of trades and negotiation of settlements with the administrators of LBIE in Europe. Prior to Chatham, Joseph worked as a Senior Legal Counsel with Deutsche Bank, first with the Global Funds and Derivatives Team and then with the Passive Funds team in London. Before Deutsche Bank, Joseph spent six years at Russell Investments where he worked as a Senior Legal Counsel on funds and derivatives. Joseph graduated from Cambridge University with a law degree.

 

 

Valuing Derivatives Under AASB 13 Fair Value Measurement

February 17, 2015, Finance and Treasury Association: Australia
By Andrew Brown, CFTP and Steve Castleton, CPA
“AASB 13, Fair Value Measurement (“AASB 13”) was issued in 2011 and became effective January 1, 2013. Even though the standard has been effective for nearly 2 years, many companies are either still grappling with how to implement the standard with respect to derivative valuations or need to continue to refine their process based on feedback from auditors or an evolving derivative portfolio.”

Download Complete Article