Risk Management

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IFRS 9: A Practical View of Hedging Fulfilling hedge accounting requirements under IAS 39 has caused headaches for treasurers, but with IFRS 9 accounting standards on the horizon, HSBC highlights the potential benefits for corporates.

IFRS 9: A Practical View of Hedging 

IFRS 9: A Practical View of Hedging
by Dipak Khot, Thought Leadership, Global Markets Corporate Services, EMEA and Michael Anthony, Global Head, Thought Leadership, Global Markets Corporate Services, HSBC


Fulfilling hedge accounting requirements under IAS 39 has been a major headache for treasurers since it took effect in 2005, often requiring complex hedge designation, documentation and new processes to assess hedge effectiveness and measure ineffectiveness.


In many cases, HSBC has observed that treasurers found that accounting considerations have become more important in defining risk management policy than the risks themselves, creating an inevitable tension. Whilst IFRS 9 hedge accounting still involves complexity and detailed requirements, the alignment to risk management activities could offer a variety of advantages for treasurers. 

This article highlights the potential benefits of adopting IFRS 9 hedge accounting, specifically for corporates. As with any such internal accounting replacement programmes, in order to achieve the full benefits there is likely to be cost involved due to operational changes that will be required. It might also expose corporates to a potential for increased accounting risk due to complexity. 

 

Key Points

  • IFRS 9 has been designed to replace IAS 39 for the accounting of financial instruments. It is effective for annual periods beginning 2018, but some entities may choose to adopt the new standard earlier (for Europe, following EU endorsement).
  • The new IFRS 9 hedge accounting requirements are aligned more closely with risk management activities than IAS 39.
  • At the present time adoption of IFRS 9 Hedge accounting in 2018 is optional, however treasurers should review the new standard and consider any benefits of adopting the new requirements along with changes that would need to be made to policies, processes and systems. 

 

IFRS 9 in summary

There are three parts to IFRS 9:

  • Classification and measurement 
  • Impairment; and 
  • Hedge accounting. 

 In the first instance, having classified how assets and liabilities are managed, IFRS 9 introduces a principles-based model that then uses cash flow-based characteristics to further determine the classification of assets, replacing the more rule-based requirements under IAS 39 that can sometimes be difficult to apply. Second, the new standard better recognises credit risk inherent in financial instruments by introducing a requirement to recognise expected credit losses on a more timely basis, addressing weaknesses of the incurred loss model in IAS 39 that were exposed during the global financial crisis. Finally, hedge accounting requirements now enable treasurers to focus more on hedging financial risks with perhaps more of their activities actually qualifying for hedge accounting.


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