The impacts of IFRS9 in Treasury and Risk Management Systems

Born out of necessity as a result of the global financial crisis of 2008, this international accounting standard is expected to bring greater stability to financial statements.

If banks and institutions, whose balance sheets are mainly composed of financial assets and liabilities are the main stakeholders, the impact of the new standard on corporate treasuries should not be overlooked.

As a reminder, the purpose of IFRS9 is as follows:

• Remove the excessive complexity of IAS39
• Restrict the volatility associated with IAS 39
• Reconnect accounting and risk management in terms of hedge accounting.

IFRS9 breaks down into three phases:

• A logical approach to the valuation classification of financial assets and liabilities
• A new approach to hedge accounting
• New impairment models

Financiel assets

Three types of accounting classifications are available:

• Amortized cost
• Fair Value through Other Comprehensive Income
• Fair Value through Profit and Loss

The impact in terms of valuation rule is going in the direction of simplification.

Thus, the particular case of embedded derivatives is representative of this simplification: it will no longer be necessary to make the distinction between the value of the asset and the value of the derivative (causing a large complexity in terms of systems).

On top of that, the existing calculation methodologies under IAS 39 (amortized cost, fair value) are still relevant.

Finally, reclassification cases, which are always complex to manage from a system point of view, are now extremely limited.

Consequently, the impact at the Trade and Risks Management System (TRMS) level is to create the three new classifications listed above, which will replace existing models. As a result of the implementation, transactions will therefore have to be associated with one of these categories.

Apart from the new classification creation, the accounting scheme configuration will nevertheless have to be marginally modified in the TRMS.

Financial liabilities

The IFRS 9 norm brings little changes compared to IAS39.

Indeed, the amortized cost is generalized, and the fair value through profit or loss valuation option remains. However, a provision for the recognition of changes in fair value related to credit risk in other comprehensive income for financial liabilities carried at fair value through profit or loss is now available.

Consequently, as enhancements are minor, they have only very limited impacts in terms of systems.

It is at the hedge accounting level that the standard modifications are the most crucial, with the aim of aligning accounting processes with the risk management.

The impacts are at the following levels:

Eligibility of the hedging type

The three existing hedging types remain (Fair value Hedge, Cash Flow Hedge, Net Investment Hedge).

Nevertheless, a major change occurs in the integration of the FX option time value in the hedging cost.

Indeed, one of the major issues related to IAS39 is that the option time value creates P&L volatilities, disconnected from risk management, to the point that certain groups have chosen to modify their risk management policy to avoid this accounting impact.

Nevertheless, this change requires a process of recycling time values from OCI to P&L.

Two options seem to be adopted to date:

• OCI to P&L Recycling of the initial option time value symmetrically to the hedged item impact (time period related)
• OCI to P&L Recycling in order to amortize the initial option time value over the life of the hedge transaction

Similarly, an option is now proposed by the norm to assimilate the swap points of forward contracts as a hedging cost: the same approach as for option time values.

Eligibility of hedging instruments

The new standard requires few changes on eligible hedging instruments.

Progress is being made in terms of eligibility of option strategies, as well as the possibility of designating the non-derivative financial instruments booked as a hedging instrument at fair value through P&L.

Eligibility of the hedged instrument

IFRS9 extends under certain conditions the risk component hedging to non-financial instruments.

In addition, the new standard introduces the ability of hedging an aggregate exposure, provided that the entity manages its risk on a net basis at the operational level as well.

Meeting efficiency criteria

The new efficiency criteria are much less arbitrary than the 80-125% efficiency range that will be removed with IFRS 9.

Prospective tests are maintained but relaxed. Thus, the rebalancing, which enables to adjust the hedge ratio, avoids the risk of breaking the hedging relationship as imposed by IAS39 in case of inefficiency.

Nevertheless, it will always be necessary to quantify the inefficiency of the period in order to recognize it in P&L.

Counterpart of these enhancements

More documentation will be required and additional information will have to be provided in appendix.

The overall objective is to improve investor information.

Impacts on Treasury and Risk Management Systems

The impacts of hedge accounting enhancements in terms of system are fairly substantial.

• The need to enrich the FX transaction capture with the date(s) on which the underlying is supposed to be unwound,
• Changes in accounting schemes (at least for FX transactions),
• Adjustment of efficiency calculation processes,
• Documentation enrichment.

IFRS 9 introduces a new model of impairment, which will require faster recognition of expected credit losses.

However, while this aspect of the norm is fundamental for institutions whose financial assets represent a substantial part of their balance sheet, it is not so crucial in a non-financial corporation. Consequently, there is little likelihood that the model will have to be integrated into the TRMS.

IFRS 9 will be effective on 1/1/2018. As such, it is high time to start the implementation project with a specification phase of the norm with regard to its impacts.

The implementation of the standard is not limited to an accounting project, but involves challenges in terms of costs, organization of IS and business model.

Through the convergence of certain risk / accounting processes that it induces, it raises the question of the implementation of a common system between risk management and accounting (of financial transactions), thus reducing potential inconsistencies between risk, regulation and accounting.

This project can be an opportunity to deploy a solution that supports shared processes between risk management and accounting functions in one single system.