New changes to IFRS


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New changes to IFRS

  1. 1. PwC Treasury Hot Topics y pBrussels – February 24th, 2011
  2. 2. Fm/flj/H/EACT/2007_bu udapestt2
  3. 3. 20 NTAs are presently E.A.C.T members udapesttFm/flj/H/EACT/2007_bu 3
  4. 4. Fm/flj/H/EACT/2007_bu udapestt4
  5. 5.  Many decisions having a direct effect on the treasurer’s job are now taken by European bodies (EU Commission, ECB, CESR, European Parliament).  It’s important to give treasurer’s opinions at these levels  Treasurers associations in Europe decided to join their forces and to create EACT  Informal meetings from 1998  EACT - Euro Association of Corporate Treasurers – set up in 2002  B Becomes European Association of C E A i i f Corporate T Treasurers in 2004 i  Semestrial meetings udapesttFm/flj/H/EACT/2007_bu 5
  6. 6. E.A.C.T EACT  More than 8.500 members  +/- 4700 corporates Objectives  To develop and strengthen relations with European and International Authorities and Institutions.  To share experiences, express common points of views, undertake joint actions on financial and treasury matters as well as relationship with financial partners.  To carry out and publish common surveys and working on white papers  To lobby all decisions bodies acting on treasury matters udapesttFm/flj/H/EACT/2007_bu Objective is to serve and support our members 6
  7. 7. Fm/flj/H/EACT/2007_bu udapestt7
  8. 8.  EACT is a grouping of national associations representing treasury and finance professionals  Speaking with a united voice, the EACT creates a greater impact than the sum of its individual component actions. This gives prominence to the issues faced by treasury and finance professionals across Europe with the European authorities, national governments, regulators and standard-setters.  Together we promote the value of treasury skills through best practice and education. We ensure that the treasury role continues to evolve as an essential component within a dynamic financial environment. fi i l i t udapesttFm/flj/H/EACT/2007_bu 8
  9. 9. Fm/flj/H/EACT/2007_bu udapestt9
  10. 10. Fm/flj/H/EACT/2007_bu udapestt10
  11. 11. The third episode… the most exiting p g May the force blows your mind? udapesttFm/flj/H/EACT/2007_bu
  12. 12.  4 Objectives of the IASB hedging project 1. “To improve the decision-usefulness of financial statements for 1 To decision- users by fundamentally reconsidering the current hedge accounting requirements” 2. To entity s 2 “To represent in the financial statements the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss” 3. Better link to risk management and purpose for entering into a 3 derivative 4. Many of the prohibitions/rules in IAS 39 proposed to be removed udapesttFm/flj/H/EACT/2007_bu 12
  13. 13. 1. The 1 Th HA model proposed i th ED provides a number of significant d l d in the id b f i ifi t improvements that should make HA easier. 2. EACT also acknowledges that the objective of reflecting in financial for corporate treasurers reporting the extent and effects of preparers’ risk management strategies is good and even necessary. 3. The approach of IFRS 9 tends to be more principle-based (which was an objective earlier expressed by the Board of IAS and requested by EACT through FIWG). 4. However EACT is of the opinion that there are few p issues in the current proposal that it wants to officially comment. 5. Some o t e measures proposed should add a higher So e of the easu es p oposed s ould g e degree of complexity (e.g. rebalancing of HR, treatment of TV of option, additional disclosures and figures gross-ups, etc.). udapesttFm/flj/H/EACT/2007_bu 13
  14. 14. 6. Examples of improvements welcomed b EACT E l fi l d by  e.g. relaxing assessment of hedge effectiveness  e.g. possibility to designate derivatives, risk components and net positions as h d d i ii hedged items  Possibility to apply HA to components of the non-financial items It will make HA significantly more flexible (even if sometimes more complex too) EACT is not necessarily convinced H.A. use will be i b increased with new measures proposed d ith d udapesttFm/flj/H/EACT/2007_bu 14
  15. 15.  EACT agrees on the idea that disclosures play fundamental role i h id h di l l f d l l in complementing financial information derived from a more principle- based and judgemental approaches proposed by IASB. It also agrees on more judgemental approaches. However, it also underlines the additional workload for preparers and risk of disclosing highly sensitive information, which can give competitive advantages to competitors about hedging strategies g p g g g  In short, EACT wants to make sure measures proposed:  Really simplify HA  Are not inconsistent with usual risk management practices and strategies applied by corporate treasurers  Are converging further towards US GAAP (Northwalk Agreement)  Are more principle-based p p  It should improve significantly information for user and allow better understanding of corporate strategies. udapesttFm/flj/H/EACT/2007_bu 15
  16. 16. Fm/flj/H/EACT/2007_bu udapestt16
  17. 17.  Welcome the IASB’ project to improve and simplify IAS 39 and W l h IASB’s j i d i lif d undertake a fundamental review of the standard.  IAS 39 has widely been regarded as unduly complex and often leading to unrepresentative accounting outcomes outcomes.  We believe that hedging is an economic activity and that hedge accounting should be designed to reflect the economic reality of risk management management.  IAS 39 hedging is rule based whereas IFRS 9 is /should be, in general, principle-based.  Many of the rules related to hedge accounting were drafted to How to tie an IFRS prevent abuse. We believe that these strict anti-abuse provisions nine knot? encourage constituents to structure transactions to avoid running afoul of these rules.  As a result, the treasury community has experienced a worrying trend in recent years, of risk management activities often being structured sub-optimally to fit within the strict guidelines of IAS udapestt 39. 39Fm/flj/H/EACT/2007_bu 17
  18. 18.  In ddi i I addition, compliance requires significant time and effort which i li i i ifi i d ff hi h is disproportional to the benefit obtained.  Although we recognize that there have to be controls over the application of HA, we believe that this control would best be HA accomplished through use of professional judgment rather than rules- based standards. • However, EACT agrees with the objectives of the Board. • IASB had taken the right approach not to start with a blank page, but focused on patching up the current framework. • In general the changes proposed are welcomed, as they bring accounting closer to the risk management strategy of non- financial companies and simplify hedge accounting rules. udapesttFm/flj/H/EACT/2007_bu 18
  19. 19. 1. Qualifying for HA – the “unbiased” concept – a new approach 2. Hedged items – components of non-financial items 3. Hedged items – groups and net positions 4. Hedge with options 5. Presentation and disclosures udapesttFm/flj/H/EACT/2007_bu 19
  20. 20.  Voluntary de-designation prohibited (when all the qualifying de- criteria are still met) EACT ddoes not agree with the proposed prohibition on d d i ih h d hibi i de-designation f the i for h following reasons:  This is not in line with current risk management market practice as for example when a company enters into a cash flow hedge for forecasted sales in FX. As the p y g aim of risk management strategy is to protect its cash flows, the hedging horizon would be until settlement of the invoice. However, HA would only be applied until the moment the sales invoice becomes an on B/S item, after which the company obtains a natural offset in the income statement through the p y g revaluation of both hedged item and hedging instrument.  EACT feels that this rule could be circumvented by applying the strategy of taking an opposite derivative position, and applying hedge accounting on the whole structure. Hence we do not see the benefit of this prohibition.  EACT members have difficulty in applying this concept to situations of net investment hedges. udapestt There is a general consensus among our members that de-designation g g gFm/flj/H/EACT/2007_bu flexibility is needed and required to align closely to the risk management strategy. 20
  21. 21.  Mandatory B l M d Balancing i EACT members are very pleased that the arbitrary 80-125% rule is to be removed; however it is felt that it is unnecessary to introduce a mandatory rebalancing, for the following th f ll i reasons:  This represents a lack of confidence in risk management, whereas the risk management strategy and results need to be disclosed in the financial statements and defended towards auditors and investors  Rebalancing is the core responsibility of risk management, which is a respectable profession with applicable standards and controls in place  This will not be equal for every company, as each of them has to deal with different circumstances  If a company were to rebalance, this would mean in practice a need to reclassify from ineffectiveness into trading, which would give the same result  If a company were to set the optimal ratio incorrect, the resulting p y p , g ineffectiveness would need to be recorded in the income statement anyway  EACT believes that it would increase complexity. How to define the optimal ratio? Different risk managers, will reach different conclusions, as this is not a udapestt matter of facts but based on interpretations and differing models or views of facts,Fm/flj/H/EACT/2007_bu the market. Another example would be on how to deal with a gradual change in hedging ratio? 21
  22. 22.  Calculation of ineffectiveness using discounted spot In general EACT agrees with the need to include time value in the ineffectiveness calculations; however this should not be made mandatory. According to our members, this would give rise to unnecessary ineffectiveness in some circumstances e.g. when using short term rolling forward contracts whereby the intent is to hedge the undiscounted spot component, but not the interest component. Therefore, we would propose to allow the use of undiscounted spot in some circumstances. udapesttFm/flj/H/EACT/2007_bu 22
  23. 23.  “Separately identifiable” and “reliably measurable”  EACT is very pleased with the proposed changes. In terms of the changes eligibility of the implicit risk, it is proposed that each company should be able to decide whether an implicit risk is an eligible hedge item, based on the link/correlation and overall risk management strategy.  However it should also be required to provide sufficient disclosures on this in the notes to the financial statements, and therefore enable users to understand the nature of the strategy. As a result, the assumption would also b th t th h d relationship would b 100% effective, and ld l be that the hedge l ti hi ld be ff ti d that, to be consistent with the risk management strategy, the hedging result should be taken when the hedged item affects the income statement.  This simple and pragmatic approach is proposed because it is difficult to imagine a way to determine any ineffectiveness on the hedged implicit udapestt risk.Fm/flj/H/EACT/2007_bu 23
  24. 24.  Layers  We are positive about the IABS’s proposed changes.  Designated component must be less than or equal to the total cash flows  EACT disagrees with this restriction. We believe that if the restriction components are present, they should be entitled to the same hedging possibilities. In instances where a commodity is quoted or priced at a discount to the futures price, the exchange-traded amount should still qualify as a component which can be hedged. udapesttFm/flj/H/EACT/2007_bu 24
  25. 25.  Income statement presentation  EACT does not agree with the proposed changes, as it believes this leads to misleading/meaningless numbers in the income statement. It is proposed to gross up the result in a manner similar to creating synthetic derivatives. This would be the only way to truly reflect the risk management rationale behind hedging sales and purchases on a net basis. Furthermore, this approach ensures conceptual alignment with the hedging of a gross group of dissimilar items (which also includes opposite movements), where here it would be acceptable to gross up the result.  Same period  We disagree with the proposed changes, as we believe the focus should be on the cash flow period and not on the P&L period. Any restriction in periods would create a restriction on hedge accounting which in no way reflects the risk management strategy strategy. EACT welcomes the proposed changes, however it believes they udapestt do not go far enough as most cases of net position hedging are g g p g gFm/flj/H/EACT/2007_bu related to the hedging of sales and purchases in foreign currency, which typically does not occur in the same month. 25
  26. 26.  It is agreed that these are positive changes, as they brings IFRS closer to US GAAP. EACT members agree with the fact that the premium has to be reflected in the underlying whether it is sales, purchases or interest. For period-related hedges, it was felt that the correct period for amortization is the entire life of the debt (in the case of a cap or collar), without taking into account certain fixing moments. In terms of transition period, EACT would encourage more clarity (e.g. to amortize th OCI over th ld l it ( t ti the the lifespan of the underlying). udapesttFm/flj/H/EACT/2007_bu 26
  27. 27.  Fair Value Hedge model We do not see the benefits of grossing up OCI for the following reasons: g g p g  In spite of helpfulness of more comprehensive disclosures, it is not useful for investors to have this information on the face of the balance sheet  This approach adds unnecessary complexity  Cash Flow Hedge model – mandatory basis adjustment EACT does not agree that this should be made mandatory. Mainly for operational reasons it would be preferable to allow the current choice ( g (e.g. inventory systems are not designed to deal with this adjustment). y y g j ) udapesttFm/flj/H/EACT/2007_bu 27
  28. 28.  Cash flow hedge model – recycling out of equity  This is not considered a useful change, as it adds unnecessary s s ot co s de ed use ul c a ge, t u ecessa y complexity. According to our members, equity is meant for transactions with owners and should hence not be mixed.  Disclosures  There is a general concern regarding the disclosure of commercially sensitive information. Many EACT members believe y y such disclosures, including those on risk exposures, whether hedged or not, should be part of a broader project on risk management in more general terms, rather than financial risks only. EACT representatives would lik t offer t work t g th l t ti ld like to ff to k together with investors and the IASB to come to a suitable solution to help disclose the appropriate level of detail on the risks, risk udapestt exposures and risk management. p gFm/flj/H/EACT/2007_bu 28
  29. 29. 10 years under IAS 39… celebration or funerals? udapesttFm/flj/H/EACT/2007_bu 29
  30. 30. Thank you !F. Masquelier F. MasquelierRTL Group ATELSVP Treasury, Corporate Finance & ChairmanERM45, bld Pierre Frieden 45, bld Pierre FriedenL-1543 Luxembourg L-1543