The EU and US’ shift in accounting standards may bring balance sheet losses and increase credit risk, according to James Elder, director of risk services at Standard & Poor’s (S&P) Global Market Intelligence.
Global accounting standards can currently be divided between the US (which has recently introduced ASC 606 and IFRS 15) and the rest of the world, Elder told GTNews at this year’s AFP conference.
“Treasurers are going to have to start recognising losses in some of those future business transactions. That will have a very tangible impact on the bottom line of the company,” he said.
This is because, instead of taking reserves when exposures or investments become impaired, they need to be assessed at the initiation of the transaction to reserve for potential future losses, even if the counterparty is healthy.
“Treasurers are going to have to start recognising losses in some of those future business transactions. That will have a very tangible impact on the bottom line of the company”
This could impact the profit and loss of the firm, said Elder.
“Europe is a bit ahead of the game compared to the US but it is coming to all of the regions,” he added.
The revised International Financial Reporting Standard (IFRS 9) has a 2018 start date but CECL is expected to be implemented in the US in 2020 to 2021 for publicly listed and private firms.
Rising interest rates, rising credit risk
Rising US interest rates are also expected to increase the credit risk for some businesses, Elder has warned.
“Interest rates have been held low by the Federal Reserve has had a positive effect on credit risk as financing is cheap,” Elder told GTNews.
“Therefore, as rates rise, financing will be harder to get and prices may start to rise too so we anticipate some change in credit risk.
He added: “If President Trump lowers the corporate tax rate that would probably be a positive for US businesses.”
Increased credit risk may hit some industries harder than others. In recent years businesses operating in the retail and energy space have experienced increased credit risk due to economic and geopolitical pressures and digital disruption.
“We are seeing a lot of enquiries from treasurers that manage their company’s supply chain and credit risk.
“Firms are looking to increase their ability to assess their financial health,” said Elder, who argues S&P’s risk models can help them do this.
“We previously surveyed members of the non-financial corporate community and asked them how many exposures they had from a counter party risk perspective. More than 40% of those companies had over 1000 exposures.
“Technology solutions help them assess their exposures more efficiently. They can then be more proactive in preventing future losses,” he said.
On the third day of the Singapore Fintech Festival conference, there was a focus on specific applications of fintech innovation. One was trade finance, which is clearly is ripe for a revolution.
Kicking off day two of the Singapore Fintech Festival, Deloitte Chairman David Cruikshank said that fintech is significant for three reasons. First, customer expectations of services are higher than ever. Second, barriers to entry are lower than before. And finally, financial institutions (FIs) face a threat of what a competitor might do.
#PSD2FinishLine recently started trending on Twitter. As the country slowly grows in excitement throughout the month of November, with the C-word on ... read more
Market uncertainty, a lack of necessary infrastructure and enforced regulatory standards means that the revised European Payment Services Directive (PSD2) may not be actively enforced until mid-2019, ACI Worldwide executives told GTNews at Money 20/20.