Companies have little time left in which to begin hedge accounting technology projects, now that the European Commission (EC) has endorsed International Financial Reporting Standard (IFRS) 9, says Reval.
The global software-as-a-service (SaaS) provider for treasury and risk management solutions is reminding all companies reporting under IFRS that want to implement hedge accounting compliance technology they should now have projects underway.
The reporting standard, which replaces International Accounting Standard 39, Financial Instruments: Recognition and Measurement becomes mandatory for years beginning on or after 1 January 2018.
“There is not much time left to research, select, approve and implement new technology, if you don’t already have a IFRS 9 compliant system in place,” said Jacqui Drew, director of solution consulting, Reval.
“While companies in jurisdictions that allow early adoption have already begun implementing new IFRS 9 functionality, there are still several, including all those in the European Union (EU), that have yet to begin. I don’t think companies quite realise the time that is required to take a project from beginning to end.”
The replacement of IAS 39 with IFRS 9 began in 2008, but the final standard wasn’t issued in its entirety until 2014. The new standard comprises classification and measurement, impairment and hedge accounting, each of which were completed at different times. While some companies were early to adopt the standard in Australia, Canada, Japan, Switzerland, South Africa and India, those incorporated in the EU have been delayed until 22 November 2016, when the EC finally endorsed the standard.
“Many companies outside the EU that we have been working with over the last 12 to 18 months have decided to use early adoption as an opportunity to look more fundamentally at how they are hedging exposures and how they can gain financially from new hedging strategies previously disallowed under IAS 39,” Drew says. Unlike hedge accounting under IAS 39, the new standard enables companies to better reflect their risk management activities in their financial statements.
Of particular interest to commodity hedgers is the ability to hedge components of non-financial items. In a recent Reval survey, almost 70% of corporates said they were considering – or had already considered – entering into new hedging strategies as a result of IFRS 9. “You don’t want to be left behind against your competitors,” Drew warns.
IFRS 9 also allows the time value of options to be initially recorded in equity (Other Comprehensive Income), instead of in the income statement, where it would otherwise cause profit and loss (P&L) volatility. As a result, Drew has seen an increase in the use of options among the company’s corporate hedgers.
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