Impact Analysis of IFRS 9, November Update

Chatham Financial White Papers – November 2017



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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



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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



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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



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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



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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

 


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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.

 

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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.

 

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World Infrastructure Summit 2016

September 26-28, 2016

Madrid, Spain: Join Chatham Financial in Madrid for the 7th Annual World Infrastructure & Energy Summit. Chatham will be sponsoring a portion of the event and moderating The Future of Energy & Infrastructure Finance Panel at the summit.

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ACT UK Annual Conference

May 1820, 2016

Liverpool, UK: Chatham will be speaking and exhibiting at the upcoming ACT Annual Conference. On Friday, 20 May 2016 at 9:20 am, Chatham’s Victoria Bell and Kern Roberts will be presenting on “What keeps the Treasurer up at night? Balancing risk management in the current environment.” We will be in the exhibit hall at Booth 39. We hope to see you there!

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