RiskTech Forum

Reval: Hedge Accounting - 3 Key Benefits of IFRS 9

Posted: 20 March 2017  |  Author: Jacqui Drew  |  Source: Reval


IFRS 9 is changing hedge accounting forever. A recent Reval survey shows that 70% of finance teams say that they have or will implement new hedging strategies as a result of the new standard.  Still, adoption is happening at a different pace around the world. Early adopters in Australia, Japan, India, Switzerland, South Africa and Canada are already seeing the benefits of the standard. Companies in the European Union have only begun to kick off their IFRS 9 initiatives since the European Commission endorsed the standard in November 2016. Companies still waiting to adopt IFRS 9 can learn from those that have already adopted the standard to see what they consider are the main benefits.

IFRS 9 Advantages in a Nutshell

Many corporates have been implementing the new standard since it was issued in 2014. What are the key benefits these early adopters are seeing so far?

1)  Reduced P&L Volatility

Under IAS 39, many hedges that did not qualify for hedge accounting may qualify now. For example, a company hedged aluminum to mitigate the risk associated with aluminum can purchases. The fair value movements of the hedges caused significant P&L volatility, as they did not qualify for hedge accounting under IAS 39. Finance professionals had to hedge for all risks, rather than for just the aluminum component.

Under IFRS 9, companies may be able to designate the component of a non-financial item in a hedge. This way, P&L volatility can be reduced, as the fair value movements of the derivative will likely be posted to equity. To apply component hedging, it is necessary that the component can be identified separately and measured reliably.

2)  Enhanced Risk Management Toolbox

Under IAS 39, many corporates shied away from options as viable hedging instruments. There were two reasons: the cost of entry and the apparent misleading accounting treatment. The time value of the options was posted to P&L and caused significant volatility in the income statement, when the underlying exposure had been hedged.

IFRS 9 enables hedgers to treat “costs of hedging” as a separate component of equity. As costs of hedging include time value of options – as well as currency basis and forward points – options can now come back into the toolbox of the risk manager. Among early adopters, we have already seen a significant increase in the use of options as hedging instruments.

3)  Competitive Advantage

As corporations transition to IFRS 9, they have to review their hedge accounting policies and processes closely. Often, they do not like what they discover. That is why we see many early adopters moving away from hedging risk on a silo basis to a new, dynamic risk management approach. Best practice risk management includes the use of Cash Flow at Risk (CFaR) to assess correlations among exposures in multiple asset classes and detailed analytics to understand risk drivers better. Both help risk managers to avoid over-hedging, significantly decreasing hedging cost and limiting counterparty risk.

But that’s not all.

As CFaR calculations and analysis require sophisticated Treasury and Risk Management (TRM) technology, finance teams will also benefit from preventing errors and saving time as they automate processes across the enterprise. At the end, it is the combination of the holistic risk management approach and the streamlined processes that will enable them to drive business value and gain competitive advantage.

Hedge Accounting with Reval

Reval’s Hedge Accounting Technical Taskforce (HATT) started working on IFRS 9 with the Big Four and clients early in 2013. As a result, Reval was the first global software-as-a-service TRM provider to introduce a module for the new standard.  While many finance teams are implementing IFRS 9, Reval’s HATT experts are already reviewing what impact IFRS 16 has on corporate treasuries.