IFRS 9 implementation dividing banks and corporates

By:
Kimberley Long
Published on:

The international financial reporting standard (IFRS) hedge accounting rules are likely to bring benefits to corporate treasurers, but could be a big worry for bankers.

The coming year will be the time for testing and implementing the processes for new IFRS accounting rules designed to ensure that financial reporting more accurately reflects how companies manage their risk exposures with derivative instruments.

Bob Stark-160x186
Bob Stark, Kyriba

Bob Stark, vice-president of strategy at Kyriba, says: “The regulation comes into play in January 2018, so 2017 is the year of planning and making changes in anticipation of adoption.”

The new rules, promulgated by the International Accounting Standards Board (IASB), are being implemented to homogenize FAS 133, used in the US, and IAS 39, used in Europe. 

The split makes it difficult to form a clear comparison between what was being reported under the two regulations. The adoption of IFRS 9 internationally brings into force a recognizable classification standard.

Stark says rather than it being the implementation of new regulation, it is more the amendment of existing policy. Therefore, it is not going to be as difficult for some corporates to adopt.

“It is not the initial creation of a regulation," he says. "We see it more as an amendment to regulation that was created years ago when hedge accounting was first implemented in the US under FAS 133. IFRS 9 tries to address the weaknesses in its predecessor regulations and creates an opportunity to make derivative accounting easier.”

Benefits

There are clear benefits for some corporates in adoption. Stark says these changes will make it easier for companies to manage their commodities exposures

“Under current regulations, it is often difficult to achieve hedge accounting for commodity hedges, meaning corporates are subjected to profit-and-loss volatility if they hedge," he says. 

"In some cases, corporates are forgoing hedging which increases their exposure to commodities price risk. Under IFRS 9 it is permitted to hedge on the risk component. But this does not just apply for commodities – it applies also to foreign exchange and interest-rate hedging, including leases as well.”

Further, it will help with creating a stronger outline of the corporate’s own strategies. 

Stark says: “The documentation of a hedging strategy is more than just things that have been written down – it has importance in not only proving a hedge’s expected effectiveness, but also the continuation of that hedge over time.”

Although there are benefits for corporates, banks – most of which engage in macro hedging for whole business risk, for example through interest-rate swaps that cannot be directly linked to a specific countervailing instrument they hedge – are finding it to be hard work. 

In November, the European Banking Authority (EBA) published the Report on results from the EBA impact assessment of IFRS 9. It is the first of two planned studies into the impact of the regulation on 58 European banking institutions.

Katerina Paisiou-160x186
Katerina Paisiou, EBA

Katerina Paisiou, EBA policy expert, says: “IFRS 9 hedge accounting requirements may be regarded as being more helpful for the corporates than the banks, as it has addressed some specific issues more relevant to them. In addition, corporates tend to use less macro hedge accounting than banks.”

The report found that most banks were planning to run IAS 39 and IFRS 9 in parallel on the initial application. The duration for this dual operation ranged from six to 12 months. 

Says Paisiou: “In the report we see that around half of the banks in our sample prefer to continue applying the hedge requirements of IAS 39 rather than to move to IFRS 9. This is also subject to the developments related to the dynamic risk-management project of the IASB.”

Cooperation

The EBA report also highlighted concerns about how the rules will impact cooperation between banks and their corporates.

“Another outlook is the impact on lending practices between bank and corporates," says Paisiou. "The survey found that IFRS 9 impairment requirements might have an impact on lending practices, related to the pricing of products, the maturity of the products and credit risk monitoring. 

"However, one may argue that IFRS 9 may reflect better the price of the credit risk of exposures.”

Despite worries, the EBA is confident the industry will be ready for the deadline. 

Says Paisiou: “The implementation has progressed from mainly the design to the beta phase, and the industry and auditors are trying to make it effective by 2018. Some strategic solutions for the implementation of IFRS 9 might not be completely there on January 1, 2018, but banks are confident they can deliver tactical solutions to meet effectively the objectives of IFRS 9 on time.”

For those companies that are looking into hedging for the first time, the coming 12 months will be about them effecting their strategies to meet the deadline. 

Kyriba's Stark says: “For companies where it simply comes down to a change in tactics, it is not a big problem. But if it requires a change in behaviour or risk-management strategy, where hedging has not been used before, then there will be work to do.

“Structuring the hedging programme and initiating the policy changes around what can or can’t be hedged takes time to implement. Leaving it to 2018 to implement will mean missed time when they could have added value to their bottom line.”

Delays

Paisiou at the EBA says any delays are likely to be apparent depending on the size of the bank.

“The smaller banks were more likely to be lagging behind the larger banks in the implementation of IFRS 9," she says. "We look at the different reasons for that and found that, among others, the scale of the project of IFRS 9 implementation would be generally higher for larger banks, but also that larger banks have more available resources to invest on IFRS 9 implementation.”

The EBA report notes this delay might be down in part to smaller banks having less to implement and therefore not needing to begin until closer to the deadline. Even so, Paisiou adds there is work to be done even after the end-date passes.

“It can be considered as a starting to point, and implementation efforts will continue after January 1, 2018, if necessary, as this date is not the end of the process,” she says.

Stark says, for the corporate treasurers, January 2018 will be the successful end of a long process.

“Those more sophisticated in hedging have been waiting some time for this, and many will early adopt if they haven’t done so already," he says. "These are often the treasurers that were lobbying for change in the first place.”