Review of two important Treasury Accounting Standards – IFRS 9 and IFRS 13

By Dominic Oberlaender - Consultant at ConVista Spain

The International Financial Accounting Standards (IFRS) are challenging many corporate and financial service companies while applying the standards set by the International Accounting Standards Board (IASB).

Especially in the area of financial instruments accounting it is possible to observe a strong movement towards a revolution of accounting standards. This goes back to the financial crisis and the need for renewing accounting principles. Specifically the incurred loss model of IAS 39 was a driver for this scenario, since the model foresees the accounting for losses when they occur (triggering event). Therefore, during the financial crisis impairment losses have been realized too little and too late. Critic from various sectors also came along regarding the Fair Value accounting which increased volatility in profit and loss during the financial crisis.

However, the international accounting standards set by the IASB are for most european and many international companies the leading operative accounting area next to the local GAAP. The goal of increasing transparency and achieving high quality accounting standards through applying IFRS is inevitable and necessary.

Due to the importance of international accounting standards, we want to review two important treasury accounting standards in IFRS:

• IFRS 9 - Financial Instruments (replacement of IAS 39)
• IFRS 13 – Fair Value Measurement
  

IFRS 9 – Financial Instruments

This accounting standard can to some extend be considered as the reaction on the financial crisis and the earlier mentioned impairment losses and P&L volatility due to accounting for financial instruments regulated by IAS 39.

IFRS 9 is divided into three sub-projects:

 

1. Classification and Measurement

2. Amortized Cost and Impairment

3. Hedge Accounting

This set up responds also to the content of IAS 39 that is currently in place. Some maybe have noticed that it got a bit quieter about IFRS 9 in the recent past. This can have a relation to other regulations such as EMIR, Solvency II or SEPA. However, IFRS 9 is still present on each agenda of a Treasurer in 2013 and will be ahead. Therefore, it has been outlined the current roadmap of IFRS 9 as shown in the figure below:

 

 

Classification and measurement as well as impairment are currently open for Redeliberation, which means that the board is consulting about the standards set out in this framework. The target IFRS for Hedge Accounting is set due to the plan by Q4 in 2013. Additionally, the discussion paper (DP) for accounting for Macro Hedging is still pending and planned for Q4 in 2013 as well.

Due to recent discussions the effective date has been set to 01.01.2015. However, the standard is available for earlier application.

The characteristics of classification and measurement in financial instruments accounting are defined by a reduction of the measurement categories to two categories. These categories are fair value and amortized cost. This makes the classification of financial instruments easier as before under IAS 39 with four categories.

The second part of the accounting standard refers to amortized cost and impairment of financial instruments. Important to know in this context is, that a credit risk component has to be included into the effective interest rate. The discounting of “expected future cash flows” will also lead towards continuously adjusted values and therefore in less volatility in impairment losses.

The third phase in IFRS 9 changes the existing rules of IAS 39 in terms of Hedge Accounting. Important renovations are the elimination of the 80% / 125% effectiveness rule and a movement towards a prospective effectiveness testing. Finally, the objective to reduce complexity in reporting of financial instruments that addresses the risk management strategies of open portfolios (Macro Hedges) is still pending. This goes in hand with a closer alignment of a company’s risk management activities.

IFRS 13 – Fair Value Measurement

The accounting standard IFRS 13 – Fair Value Measurement is a single IFRS framework for the definition of the fair value. This standard applies for all IFRS that permit a fair value measurement. This means that for IAS 39 the definition of the fair value has changed and will in future be defined by IFRS 13. The IASB has published this due to the importance of fair value measurement in financial accounting.

Moreover, the fair value measurement receives a stronger market based approach to increase comparability. In IFRS 13 the IASB continues the consideration of non-performance or rather credit risk while determining fair values. One can interpret this due to the effects of the financial crisis. However, the applying entity is in charge to obtain adequate data about a counterpart’s credit risk and its own credit risk. As a result the used discounted cash flow models have to include e.g. credit spreads in order to tackle this issue.

Furthermore, IFRS 13 requires the entity to disclose all information about fair value measurement. This considers the valuation technique as well as the input with regards to the fair value hierarchy. 

As a conclusion, it can be said that the International Financial Accounting Standards (IFRS) continue to be a challenging environment in terms of their development and application within corporates and financial service companies. After the financial crisis it is possible to observe a stronger movement towards future orientated measurements of cash flows and risks as indicated by IFRS 9 and IFRS 13. Whether this is enough to establish profound accounting standards can only be verified when the next financial breakdown comes ahead.