What The Updated EU Standards Mean For Corporate Hedging


Companies within the European Union, listen up: The European Financial Reporting Advisory Group (EFRAG) has embraced new financial standards on financial instruments, and earlier adoption is now possible within the EU.  IFRS 9 Financial Instruments will become effective for years beginning on or after 1 January 2018.

The standard is technical and complex, but according to EFRAG in a 2015 letter to the European Commission, the legislation would be a significant improvement over previous rules (as currently outlined in the International Accounting Standard 39 (IAS 39): Financial Instruments: Recognition and Measurement), particularly for “basic lending instruments, in the impairment of financial assets and hedge accounting.”

According to treasury software provider Reval, it means time is running out for EU companies to research and understand the new standard — and to react appropriately.

“There is not much time left to research, select, approve and implement new technology, if you don’t already have an IFRS 9-compliant system in place,” warned Reval Director of Solution Consulting Jacqui Drew in a statement issued Monday (Nov. 28).

Drew spoke with PYMNTS to further explain the regulation and what it will mean for EU firms.

IFRS 9 was initiated among the G20 leaders in 2008, she explained, largely in response to the global financial crisis.

“Its key aims are to reduce the complexity of financial instrument reporting,” she explained, “and to enhance the ability of investors and other users of financial information to better understand the accounting of financial instruments [tradable assets].”

According to Drew, the current rules under IAS 39 are too complex for companies preparing financial statements and the investors who need to make decisions based on those statements.

“Many users felt that the requirements of IAS 39 were difficult to understand, apply and interpret,” she explained.


Impact On Hedging

Non-financial companies will see one of the largest impacts of the new standard on their hedging activities, Drew added.

“The aim is to align the hedge accounting rules with an entity’s risk management activities,” she explained. According to the IFRS website, the revised standard would change the way companies need to report and account for their hedging activities based on risk management of that hedging, making it easier to reflect that risk in their financial statements.

“As a result of these changes,” the site notes, “users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements.”

Drew said that companies that don’t adopt the new standard may be falling behind the competition.

“If companies do not elect to early adopt hedge accounting under IFRS 9, then they may be experiencing significantly more volatility than their competitors following a similar risk management strategy,” the executive stated. Under IAS 39, she explained, the costs of hedging activities were posted to a company’s Profit & Loss statement; under IFRS 9, the cost of hedging is posted to equity, then gradually released to the P&L.

Businesses that hedge commodities, Drew said, couldn’t adequately account for the cost of that activity under current standards, “and so, the fair value of these derivatives were posted to P&L and caused volatility.”

In a release, Reval and Drew said that the new standard could help companies gain from new hedging strategies currently disallowed under IAS 39.

According to the company, 70 percent of corporations surveyed by Reval are already interested in adopting new hedging strategies under IFRS 9, all aimed at reducing risk exposure.

“You don’t want to be left behind against your competitors,” Drew warned in the statement.