Trésorier/Treasurer magazine - N°90 - July/Aug/Sep 2015 - (Page 25)

FORUM HEDGE ACCOUNTING: NEW STANDARD, NEW CHALLENGES and enabling a new accounting standard for financial instruments. Applicable in 2018, it extensively changes the rules of hedge accounting, finally aligning them to actual hedging activities. One of the key changes is the possibility to hedge risk components of non-financial instruments. Hedge accounting under IFRS 9 is principle-based and is more flexible, especially for non-financial institutions. One of the key changes is the possibility to hedge risk components of non-financial instruments. The following example can serve as an illustration: Company ABC is active in the coffee market and plans to purchase a large quantity of Arabica coffee from a Columbian supplier in one year time. The purchase price will depend on: * The standard coffee price as captured by exchange-traded coffee futures (benchmark quality); * A spread representing the price differential between the actual coffee quality purchased (Arabica coffee from Colombia) and the benchmark quality that is the underlying of the exchangetraded futures; * Logistics services charges. planned purchase. The results of the regression would be unsatisfactory as the effectiveness ratio would have to fall under the 80%-125% bracket in order for the hedge accounting treatment to be allowed. But in this case, Company ABC compares futures contracts price with a transaction price composed of three different sources of price volatility. The effectiveness test was biased from the beginning. On the other hand, under IFRS 9, Company ABC would be allowed to use hedge accounting simply by demonstrating the economic relationship between the futures contracts price and the standard coffee price element of the planned purchase of coffee. Therefore, the effectiveness is based on the comparison of two analogous sources of volatility and there is no longer a 80%-125% ratio to be respected. Company ABC hedges this planned transaction using exchange-traded coffee futures contracts. Under IAS 39, to use hedge accounting, Company ABC would have to compare the futures contracts price against the global price of the LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE - N°90 - JULY In the last thirty years, financial risk management gained in notoriety and became a widely accepted practice. It was triggered by the increased volatility of the economy and it was made possible by the development of the derivative market. In 1998, the IAS Board issued IAS 39 and for the first time in accounting, it was possible to recognise derivative instruments as hedging instruments and not just as trading instruments. This option named "hedge accounting" aimed at representing in the financial statements the effect of an entity's risk management practices. Hedge accounting allows to separate hedging activities from trading operations in the statement of comprehensive income. However, in 1998, accountants and therefore the accounting profession as a whole did not fully comprehend hedging activities in contrast to today. Under IAS 39, hedge accounting was rule-based and very restrictive. It was so far from actual hedging activities that based on the financial statements, investors were not able to understand the risks that an entity faced and the efficiency of risk management strategies. And even worse, it created artificial restrictions on how an entity could hedge and forced it to abandon some hedging activities which were sound and recognised as efficient by market participants. In July 2014, the IAS Board issued the final version of IFRS 9, fully replacing IAS 39 / AUG / SEP 2015 Hedge accounting rules defined in IAS 39 have been widely criticised for their rigidity and how inadequately they reflected the reality of actual hedging activities. IFRS 9, the new accounting standard replacing IAS 39, brings flexibility, simplicity and puts hedging activities where they belong: at the centre. 25

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°90 - July/Aug/Sep 2015

Cover
Table of contents
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW DataLog Finance
FOCUS
What do financial leaders around the world earn?
BIG DATA in treasury
Credit rating agencies in the line of fire?
FORUM
Hedge accounting: New standard, new challenges
Cyber Risk: Can Insurance be an Answer?
When FX Volatility hits your Corporate Earnings - How
Best to Manage your Currency Risk
Repo cash management - how it works in practice
20 ans de AXA IM, l’histoire continue
CORPORATE FINANCE
Time for more sophisticated corporate investment strategies
VAT electronic audit file: not too late to act, but no more time to lose
Focus sur l’actionnariat salarié
Struggling with cash forecasting? You are not alone
Coupling Delegation of Authority (DOA) with Bank Account Maagement (BAM)
15 MINUTES AVEC INTL FCStone
THE RISK OBSERVATORY
NEWS
LIFE BEYOND NUMBERS

Trésorier/Treasurer magazine - N°90 - July/Aug/Sep 2015