Little time left to kick off hedge accounting technology projects
With International Financial Reporting Standard (IFRS) 9, Financial Instruments, now endorsed by the European Commission, all companies reporting under IFRS that want to implement hedge accounting compliance technology should now have projects underway, advises Reval, a global SaaS provider of treasury and risk management solutions. The reporting standard, which replaces International Accounting Standard 39, Financial Instruments: Recognition and Measurementbecomes 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,” explains 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 EU, that have yet to begin. I don’t think companies quite realize 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 was not issued in its entirety until 2014. The new standard comprises Classification & Measurement, Impairment and Hedge Accounting, each of which were completed at different times. While some companies have early adopted the standard in countries like Australia, Canada, Japan, Switzerland, South Africa and India, those incorporated in the European Union have been delayed until 22 November 2016, when the European Commission finally endorsed the standard.
“Many companies outside the EU that we have been working with over the last 12-18 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 percent 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 P&L volatility. As a result, Drew has seen an increase in the use of options among Reval’s corporate hedgers.
Reval is a global SaaS provider for Treasury and Risk Management, helping enterprises better manage cash, liquidity and financial risk, and account for and report on complex financial instruments and hedging activities.