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Beware: IFRS 9 hedge accounting: regulatory deadline is 1 January, 2018

Reval’s - global SaaS provider for Treasury and Risk Management - white paper on IFRS 9’s implications for corporate treasury is an important reminder that time is running out for compliance with IFRS 9 and its 1 January 2018 deadline. 

IFRS 9 aims to make hedge accounting less complicated and more in line with risk management activities, BUT as the authors - Jacqui Dre and Nocolas Adjemain - point out:

  • “Organizations exposed to market risk can no longer be complacent about carrying out an IFRS 9 compliance project
  • These projects take time and come along with technology investments. They require a solid business case that successfully articulates the benefits and the requirements of adoption.”

The report reviews two aspects of IFRS 9: 1) lessons learnt from early adopters and 2) IFRS 9’s key advantages.

1- Lessons from early adopters

The report highlights the three key lessons from Reval’s research and working with clients:

  1. IFRS 9 implementation projects take time: it is a drastic hedge accounting change that needs to be coordinated across the enterprise, implementation projects take between 9 and 18 months
  2. Not all treasury management systems support the new standard equally, so “early adopters share some tough questions that IFRS 9 project managers should ask their treasury technology providers”
  3. The ROI of new hedging strategies and updated risk management programs can be significant. Early adopters have seen benefits in two core categories: 1) Reduced P&L volatility and 2) Better managed risk

2 - Key advantages in IFRS 9 and return on investment

The paper examines potential ROI improvements from IFRS 9:

  1. Hedging instruments – option time value
  2. Hedging instruments – currency basis on CCIRS
  3. Hedged item – component hedging of commodity risk
  4. Hedged item – derivatives as hedged items

which cover 95% of corporate hedge accounting needs under the new standard. 

Now is the time to act

Drew and Adjemain finish with an important concluding paragraph: 

“There are many advantages in IFRS 9 when compared with the current standard, IAS 39. Those treasurers looking to protect the balance sheet may be looking at adding new commodity hedging or overlaying interest rate swaps on existing CCIRS positions and designating them in hedge relationships. The finance team will take notice at potential P&L volatility reductions on option time value, currency basis, and commodity hedging. Others may be looking at their competitors and eyeing up opportunities to bring more upside in their hedging portfolio utilizing vanilla or structured option products or by building out more dynamic hedging strategies. The key here is to take these technical concepts and evolve them into a robust and measurable ROI that senior management and the board can act upon – now.”

(For a copy of the report - recommended - see.)

CTMfile take: We have written several articles on IFRS 9 as the links below show, IFRS 9 really does represent an improvement. Reval’s white paper is a timely reminder of what to do and the benefits.

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This item appears in the following sections:
Risk Management
FX Hedging & Risk Management
% Rate Hedging & Risk Management

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