Financial instruments
What is the issue?
Financial instruments accounting is challenging as it requires both knowledge of accounting, finance and an understanding of the underlying economics of the instruments and transactions. Having knowledge and experience in both requires a specific type of professional.
IFRS 9 Financial Instruments brings fundamental change to financial instrument accounting as it replaces IAS 39 Financial Instruments: Recognition and Measurement and with it comes a series of new challenges.
Why is it an issue?
The external environment and risks that companies face are constantly changing. The funding instruments companies use and risk management are also becoming more and more sophisticated (consider options, hybrid loans and convertible bonds).
There are a number of decisions and choices to be made at transition, however even after the initial assessment of the IFRS 9 implications corporates are still expected to deal with IFRS 9 consequences to financial statements, systems, processes and controls. The implications of IFRS 9 for corporates could be wide ranging.
Possible consequences of IFRS 9 include:
- More income statement volatility. IFRS 9 raises the risk that more assets will have to be measured at fair value with changes in fair value recognized in profit and loss as they arise.
- Earlier recognition of impairment losses on receivables and loans, including trade receivables. Entities will have to start providing for possible future credit losses in the very first reporting period a loan goes on the books – even if it is highly likely that the asset will be fully collectible.
- Significant new disclosure requirements—the more significantly impacted may need new systems and processes to collect the necessary data.
- New hedging requirements and opportunities – more detailed breakdown of valuations of derivatives into risk components might be required; additional flexibility in the new hedge accounting rules allowing for new hedging strategies to be adopted.
The changes that IFRS 9 introduces also might provide a great opportunity for balance sheet optimization, or enhanced efficiency of the reporting process and cost savings.
How we can help
The financial instruments practice delivers a comprehensive service offering to our clients, assisting in complex financing and risk management transactions such as:
- Derivatives accounting and valuation
- Hedge accounting
- Accounting for complex financing (convertible debt, preferred stock, factoring, supplier financing)
- Debt vs. equity analysis
- Modifications of debt and other restructurings
Here are a few the services we can help you with:
- Building a roadmap, project management and governance for your treasury or commodity risk management functions
- Technical accounting advice
- Valuation and impairment testing
- Learning and change management support
- Processes, data, systems and controls
