IFRS 9 - pwc.nl · 14/06/2018 · PwC 14 June 2018 Strictly private and confidential Hedge...

Seminar - Hot topics treasury

IFRS 9

www.pwc.com

Strictly privateand confidential

14 June 2018

PwC 14 June 2018

Strictly private and confidential

1 Welcome and introduction 3

2 IFRS 9 recap 5

3 Detailed example currency basis spread 13

Contents

2Seminar - Hot topics treasury

PwC 14 June 2018


Welcome andintroduction

1 Welcome and introduction


PwC 14 June 2018


With you today

1 Welcome and introduction


Kees-Jan de VriesPartnerCapital Markets andAccounting Advisory ServicesT: +31 (0)88 792 49 22M: +31 (0)6 10 69 68 [email protected]

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IFRS 9 recap

2 IFRS 9 recap


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• Effective for annual periods beginning on or after 1 January 2018

Project objective

2 IFRS 9 recap


One Standard – 3 components

Classification and measurement

1

Impairment

2

Hedging

3

Responding to need forclearer guidance and

earlier impairment - IAS39 considered ‘too little, too

late’

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What has changed?

2 IFRS 9 recap


Good news

Challenges

• Hedge effectiveness:Removal of arbitrary 80-125% bright lineReduces administrative burden of testing

effectiveness retrospectivelyRebalancing – no need for de-designation

• Hedging/hedged instruments:Allowed to hedge components of non-

financial itemsAbility to hedge a net position, bottom

layer and aggregated exposuresPossible to defer changes in aligned time

value of options and forward points in OCI

• Voluntary de-designation prohibited• Hedge needs to reflect risk management

strategy• Risk policy has to be formalised• Cash flow hedges of net positions only allowed

for FX risk• Re-balancing mandatory• Systems able to support all IFRS 9

requirements?

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What has not changed?

2 IFRS 9 recap


Basic hedge accountingmodels retained

(i.e. FVH, CFH & NIH)

Hedge accountingis optional/privileged Detailed rules on

eligible hedged itemsand hedginginstruments

Documentation stillneeded

Derivatives stillat fair value

(Classification)

Ineffectivenessrecognised in P&L

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Qualifying criteria

2 IFRS 9 recap


IFRS 9 qualifying criteria

Formal designation anddocumentation

Only eligible hedginginstruments andhedged items

Meets the hedgeeffectivenessrequirements

3.1 Economic relationship between hedged item and hedging instrument gives riseto offset.

3.2 Effect of credit risk does not dominate the value changes.

3.3 Hedge ratio results from the quantity of hedged item hedged and hedging itemused to hedge.

1 2 3

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Hedge documentation

2 IFRS 9 recap


Formal designation and documentation must be in place at the inception of the hedge relationship. The documentationshould identify:

The risk management objective and strategy1

The hedged item2

The hedging instrument3

The nature of risk being hedged4

How management will assess hedge effectiveness, including giving a description of sources of expectedineffectiveness and how the hedge ratio was determined.5

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Transition

2 IFRS 9 recap


Existing qualifying hedge relationship under IAS 39 can be regarded as a continuing hedge relationship under IFRS 9 if it meets all IFRS 9criteria:

• Existing hedge relationship can be continued as is or not;

• No modification/adjustment of designated hedged item;

• Include housekeeping adjustments in documentation.

Impact:

• Existing hedge relationships continue if all criteria are met;

• Ineffectiveness due to mismatch exposure and instrument remains;

• Less ineffectiveness for new relationships due to designation of a specific risk component.

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Practical challenges

2 IFRS 9 recap


• IFRS 9 offers certain advantages related to hedge accounting, compared to IAS 39.

• However, some of its provisions are not as straight forward in practice.

• Potential implementation challenges might include:

- Calculation of the currency basis spread to be excluded from a hedge relationship;

- Discounting of the hedged items at spot FX rates when the discounting period is unknown(e.g. forecast revenue, net investment hedges);

- Identifying eligible components, especially if not specified in the contract;

- Need to separate out the hedged net position; and

- New IFRS 9 hedging disclosures even if IAS 39 hedging is continued.

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Detailed examplecurrency basisspread

3 Detailed example currency basis spread


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Loan description



Company B, with a EUR functional currency, issued the following debt:

Description Value

Type Fixed rate bullet loan

Coupon 4%

Denomination GBP

Start date 1 July 2018

Interest payable Every six months

Principal payable 31 December 2020

Please note:

• This example illustrates one possible method of applying the requirements of IFRS 9 to separate currency basis spreads when applying hedge accounting to cross-currencyinterest rate swaps. Other acceptable methodologies might also be available.

• All values in this example are indicative only and are based on an assumed currency basis spread of 1%.

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Derivative description



The company hedges the currency risk arising from the debt with the following swap:

Description Value

Type Cross-currency interest rate swap

Receive leg notional amount GBP 1,000,000

Receive leg interest rate 4%

Pay leg notional amount EUR 2,000,000

Pay leg interest rate 6%

Fixed exchange rate 2,00

Start date 1 July 2018

Maturity date 31 December 2020

Settlement dates Every six months

Fair value on designation date EUR 0

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Underlying instruments



• Swap (A): The actual hedging instrument

• Basis-free swap (B): The actual swap with the same terms and fair value on designation date, but with a recalculated ‘basis free’interest rate based on a valuation technique which excludes any currency basis spreads on designation date.

• Change in currency basis (C): The difference between (A) and (B), which should approximate the cumulative change in the currencybasis spreads (C) to be recognised in OCI (i.e. A – B = C)

• Hypo (D): a hypothetical derivative which represents the hedged item, but also constructed with exclusion of the currency basis spread.

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Fair values



Swap (A) Basis-freeswap (B)

Change incurrencybasis(C)(A-B)

Basis-freeHypo (D)

Spotexchangerate

Reporting date Fair value Fair value Cumulative Fair value GBP/EUR

1 July 2018 0 0 2.000

31 December 2018 25,000 35,000 (10,000) (35,000) 2.020

30 June 2019 30,000 33,000 (3,000) (33,000) 2.028

31 December 2019 40,000 40,000 0 (40,000) 2.040

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Main accounting entries



31 December 2018

DR CR

Derivative 25,000

Other comprehensive income – Hedging reserve 35,000

Other comprehensive income – Basis spreadelement

10,000

Full fairvalue

Basis-free fairvalue

Movement in currencybasis spreads

Fair value on designation date 0 0

Fair value on reporting date 25,000 35,000

Change in fair value (FV) 25,000 35,000 (10,000)

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30 June 2019

DR CR

Derivative 5,000



7,000

Full fairvalue

Basis-free fairvalue

Movement in currencybasis spreads


Change in fair value (FV) 5,000 (2,000) 7,000

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31 December 2019

DR CR

Derivative 10,000



3,000

Full fairvalue

Basis-freefair value

Movement incurrency basisspreads

Fair value on previous reporting date 30,000 33,000


Change in fair value (FV) 10,000 7,000 3,000

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Ineffectiveness



Ineffectiveness

Basis-freeswap

Basis-freehypo

Ineffectiveness

Fair value on designation date 0 0

Fair value on reporting date 40,000 (40,000)

Cumulative change in fair value (FV) 40,000 (40,000) 0

Previous ineffectiveness recorded 0

Additional ineffectiveness 0

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Result of hedge accounting



To summarise the result that was achieved with the hedge accounting:

• Fair value changes of hedging instrument, which include the forward points/interest element were recognised in OCI, whilst the actualforward points/interest incurred were expensed on a smooth basis;

• Any changes in the currency basis spreads were recognised in OCI, whilst the actual basis spreads were recognised in profit or loss on asmooth basis;

• Any movements in profit or loss resulting from the foreign currency translation were offset by the changes in the related componentsfrom the hedging instrument.

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IFRS 9 - pwc.nl · 14/06/2018 · PwC 14 June 2018 Strictly private and confidential Hedge...

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Transcript of IFRS 9 - pwc.nl · 14/06/2018 · PwC 14 June 2018 Strictly private and confidential Hedge...