Is your Treasury Management System ready for Transition? This article focuses on mandatory requirements; optional matters will be the subject of future contributions.
This article is a follow-up to 'IFRS 9 – What does the new standard signify for your Treasury Management System?' of September 2015. In the meantime, interpretation of the new standard has progressed further, and the ASCG (Accounting Standards Committee of Germany) and IDW (German Institute of Public Auditors), in particular, have started addressing unresolved issues. However, this process is still ongoing, leaving some detailed questions unresolved. This article focuses on mandatory requirements; optional matters will be the subject of future contributions.
In addition to the technical implementation of IFRS 9 in the treasury management system (TMS), companies should start thinking about the procedure for actual transition as soon as possible. This standard provides the following options for transition:
If option (b) is applied, IAS 8.22/24 becomes relevant: When, for the purpose of retrospective application, prior period figures are not adjusted (because it is impracticable), the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable.
IAS 8 must be applied in any event. This means a three-column statement of financial position, for which adjustment of prior year figures is not necessary. Instead, the opening balance of each affected item must be adjusted. Accordingly, a three-column statement of financial position has to be prepared for the first quarterly close of 2018, with the following columns:
During each of the three phases − classification and measurement, impairment, and hedge accounting − as well as adaptation of the TMS, this has specific consequences:
a. For all existing or designated hedges in the comparative period, for which only the intrinsic value of an option has been designated for hedge accounting, the fair value must be determined retrospectively and recognised as 'cost of hedging' in OCI in accordance with the requirements of IFRS 9. This requirement applies to the entire portfolio, thus precluding decisions on the basis of individual hedges. The fair value previously recognised separately in most cases must first be allocated to the applicable OCI and then reclassified. It can be assumed that TMS manufacturers will make the 'aligned time value' required by IFRS 9 available in each system. Allocation to OCI is usually also not a problem, but a few issues nevertheless remain, which will affect not only transition expenditure but also day-to-day operations:
i. Is the difference between 'time value' and 'aligned time value' determined as a separate figure and allocated to profit or loss, or are the individual amounts again entered separately and the difference then determined between them?
ii. Is the TMS capable of automatically reclassifying the entered 'aligned time value' from OCI to profit or loss?
b. Due to special requirements for disclosure in the notes, fair value and intrinsic value should be allocated to two separate OCI (sub) accounts. As in most cases, the configuration and entry of a second OCI account should not present a problem. But automated reversal is also an issue here, because, if this is not possible, a lot of manual effort will be required on a regular basis. Depending on the method chosen for reversal, the amounts that need to be reclassified must also be calculated outside the TMS. This is the case for example when individual amounts to be calculated have to be reclassified over a period of time rather than reclassifying the entire amount on a particular date. This manual procedure is prone to error and therefore subject to risk.
c. IFRS 9 provides the option of separately calculating and recognizing forward points (forward elements). Although this is optional and not mandatory, it could be useful to select this procedure, as forward points can be treated in line with time values. As manufacturers primarily focus on mandatory requirements, it should be put to them whether forward points could be addressed in line with time values in order to provide the same options.
d. The last issue relating to the separation of fair value in hedge accounting, discussed here, refers to the retrospective separation of cross currency basis spreads (CCBS). Contrary to the two previous points, it is possible to decide about retrospective application individually for each hedge. It is however still under discussion whether it is really necessary to calculate CCBS separately as a third component. In order to be able to estimate the expense for implementing a separate calculation, the first step is to raise the question whether this requirement is fundamentally implemented by the manufacturer in the TMS. From a professional perspective, configuring a second yield curve and calculating the difference between the measurements based on both curves seems an obvious solution. This leads to the following questions regarding transition from IAS 39 to IFRS 9:
iii. Do the additional yield curves have to be configured manually?
iv. Does further system-specific configuration also have to occur manually?
In general, IFRS necessitates changes to account structure and the related accounting rules. The fundamental issue then is whether these changes should be implemented within the current IAS 39 accounting framework or whether it would be beneficial to introduce a separate IFRS 9 accounting framework. The latter would allow a simple and clear separation between 'before' and 'after'. In that case, it would be useful if the creation and entry of the opening balance as at 1 January 2018 were to be automatically supported.
It is evident that the transition from IAS 39 to IFRS 9 raises fundamental questions with respect to implementation in the system. It is only possible to estimate and budget the costs involved once these questions have been answered. The earlier this process is started, the lower the associated project risk as at 1 January 2018.
Source: KPMG Corporate Treasury News, Edition 53, March 2016
Author: Karin Schmidt, Senior Manager, firstname.lastname@example.org
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