It is at the hedge accounting level that the standard modifications are the most crucial, with the aim of aligning accounting processes with the risk management.
The impacts are at the following levels:
Eligibility of the hedging type
The three existing hedging types remain (Fair value Hedge, Cash Flow Hedge, Net Investment Hedge).
Nevertheless, a major change occurs in the integration of the FX option time value in the hedging cost.
Indeed, one of the major issues related to IAS39 is that the option time value creates P&L volatilities, disconnected from risk management, to the point that certain groups have chosen to modify their risk management policy to avoid this accounting impact.
Nevertheless, this change requires a process of recycling time values from OCI to P&L.
Two options seem to be adopted to date:
- OCI to P&L Recycling of the initial option time value symmetrically to the hedged item impact (time period related)
- OCI to P&L Recycling in order to amortize the initial option time value over the life of the hedge transaction
Similarly, an option is now proposed by the norm to assimilate the swap points of forward contracts as a hedging cost: the same approach as for option time values.
Eligibility of hedging instruments
The new standard requires few changes on eligible hedging instruments.
Progress is being made in terms of eligibility of option strategies, as well as the possibility of designating the non-derivative financial instruments booked as a hedging instrument at fair value through P&L.
Eligibility of the hedged instrument
IFRS9 extends under certain conditions the risk component hedging to non-financial instruments.
In addition, the new standard introduces the ability of hedging an aggregate exposure, provided that the entity manages its risk on a net basis at the operational level as well.
Meeting efficiency criteria
The new efficiency criteria are much less arbitrary than the 80-125% efficiency range that will be removed with IFRS 9.
Prospective tests are maintained but relaxed. Thus, the rebalancing, which enables to adjust the hedge ratio, avoids the risk of breaking the hedging relationship as imposed by IAS39 in case of inefficiency.
Nevertheless, it will always be necessary to quantify the inefficiency of the period in order to recognize it in P&L.
Counterpart of these enhancements
More documentation will be required and additional information will have to be provided in appendix.
The overall objective is to improve investor information.
Impacts on Treasury and Risk Management Systems
The impacts of hedge accounting enhancements in terms of system are fairly substantial.
- The need to enrich the FX transaction capture with the date(s) on which the underlying is supposed to be unwound,
- Changes in accounting schemes (at least for FX transactions),
- Adjustment of efficiency calculation processes,
- Documentation enrichment.
New impairment models
IFRS 9 introduces a new model of impairment, which will require faster recognition of expected credit losses.
However, while this aspect of the norm is fundamental for institutions whose financial assets represent a substantial part of their balance sheet, it is not so crucial in a non-financial corporation. Consequently, there is little likelihood that the model will have to be integrated into the TRMS.
Effective date of IFRS 9 and conclusion
IFRS 9 will be effective on 1/1/2018. As such, it is high time to start the implementation project with a specification phase of the norm with regard to its impacts.
The implementation of the standard is not limited to an accounting project, but involves challenges in terms of costs, organization of IS and business model.
Through the convergence of certain risk / accounting processes that it induces, it raises the question of the implementation of a common system between risk management and accounting (of financial transactions), thus reducing potential inconsistencies between risk, regulation and accounting.
This project can be an opportunity to deploy a solution that supports shared processes between risk management and accounting functions in one single system.