April 2016
Financial Accounting Advisory Services
Aligning your financial risk management Align hedge accounting with your risk management and reduce the cost of hedging.
The impact of IFRS 9 Financial Instruments will vary depending on an entity’s business models, the composition of its portfolio and current accounting policies and practices. Applying the new standard will give entities the opportunity to review, as well as align, their hedge accounting and risk management strategies to help them meet their risk management and cost objectives. EY can help finance and treasury functions evaluate their value chain as they apply the new standard to identify opportunities and address risks.
With the adoption of IFRS 9 Financial Instruments, entities will have the opportunity to better align their economic risk management with hedge accounting, while reducing volatility in the profit or loss and the cost of hedge accounting. In addition, the new standard will provide the opportunity to have more flexible solutions for hedge relationships taking into account the company’s operations. With this in mind, it is now time to: • Re-evaluate the current risk management within the value chain • Revisit the foreign currency and interest rate management
• Identify opportunities for potential gains, in terms of more efficient risk management, that are aligned with your business activities and commercial goals • Evaluate whether the new standard reduces volatility in profit or loss, while having a risk management policy that is fully aligned with your entity’s risk appetite and is appropriate to the complexity of your economic risk management Focusing on your business’ activities will help ensure a unified risk management policy within your company.
Do you recognise these challenges?
Do you identify any of these challenges in your current value chain? • An imperfect split of responsibilities between treasury and procurement • Inability to hedge specific price risks inherent in the price of commodities or goods • Inability to achieve the desired risk appetite and risk management policy without an adverse accounting impact • Inability to reflect economic risk management in external reporting • Challenges with the current effectiveness methods because of low mark-to-market (MTM) values, cross-currency interest spreads or changes in hedge ratios • Challenges managing different risks arising from the same transaction, asset or liability, such as managing the foreign currency risk and the interest rate risk of funding portfolio • The need for an assessment of the value chain in light of the new opportunities available
The EY approach
Our team of professionals can support you by taking your business activities and risk appetite into account to help you: • A ► ssess potential new hedging strategies that are aligned with your entity’s risk policy • Establish whether you are able to reduce your cost of hedging • Improve the connection between your internal risk management and external reporting • Identify the changes required for you to achieve the potential opportunities available under the new standard Our approach to assessing your needs and opportunities follows your value chain, beginning with the funding and procurement cycle and ending with the collection of payment from the customers. We structure the assessment by including these four simple steps in our project plan:
Step 1 Introduction and planning
Step 2 Identify development areas and opportunities
Step 3 Design to-be process
Step 4 Final documentation
Step 1 — Define project scope: By assessing your current state scenario, we focus on your preferences regarding risk appetite and risk management processes, including desired complexity. Step 2 — Identify development areas: We assess your risks to identify potential areas of value. We prioritise these opportunities on the basis of the potential benefits and resources required to develop and maintain a solid foundation to make a qualified decision. Step 3 — Design to-be process: We work with you to define changes required to the current scenario and design new processes. Step 4 — Final documentation: We document the new, customised processes you have selected for your entity and together with you provide training for your team. Our assessment will be tailored to your needs, whether you would like an initial impact assessment focusing on the key issues and challenges, or a full analysis of your business activities, to gain a complete overview of the opportunities and remaining challenges under the new standard. Certain of our services for an audit client and its affiliates may be more limited in order to comply with applicable independence standards. Please reach out to your EY contact for further information.
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| Aligning your financial risk management April 2016
What is changing?
Listed below are some examples of the key impacts of IFRS 9 on an entity alongside an illustrative traffic light assessment of the impact of those issues. Key difference
IAS 39
IFRS 9
Complexity
Hedged item must be highly probable
Yes
Yes
Risk components eligible hedged items
Financial items only
All items
Effectiveness threshold of 80–125%
Yes
No
Effectiveness testing
Prospective and retrospective
Prospective
Type of effectiveness test
Normally quantitative
Quantitative and qualitative
Special accounting for “costs of hedging”
No
Yes
Rebalancing of hedge ratio without designation
No
Yes
Includes a derivative (hedge of aggregated position)
No
Yes
Hedges of net positions
No
Yes (certain circumstances)
Hedges of groups of items
Yes, but restrictions
Yes, somewhat softer restrictions
Permitted voluntary de-designation
Yes
Not if risk management objective is the same
IAS 39 Financial Instruments: Recognition and Measurement
None
Low
Medium
High
EY’s assessment will focus on the changes specifically relevant to you. We can support you in making an assessment of the level of complexity of these issues.
Why assess now
An early assessment will help you to get an overview of the business opportunities related to strengthening your risk management process, whether the risks are embedded in funding, purchasing, inventory management or sales. Funding Credit
Interest rate
Counterparty
FX
What risks do you have in your value chain? Sale Commodities
FX
Contracting
Purchase Commodities FX
Inventory Commodities FX
Aligning your financial risk management April 2016 |
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We recommend you consider an assessment project now to: • Develop a clear overview of your risk exposure within treasury and procurement processes • Identify new hedging and accounting efficiency opportunities aligned with your business activities • Identify and validate your initial adoption needs, such as required changes to processes and systems to apply the changes • Develop processes aligned with the new requirements and embedded in your organisation • Develop a stronger link between your treasury and procurement departments with clear roles and responsibilities
Why EY
EY offers an approach which starts and ends with your risk management and commercial goals, taking into account risks arising in every part of your business activity. By working cross-border and across our different service lines, we aim to support you with a combination of knowledgeable accounting, operational and treasury resources for your project. EY focuses on designing a tailored approach to your entity using our experience and knowledge from projects across different industries and countries. We will work hand-inhand with you to develop the project successfully.
Contacts: Hans Peter Lindegård Buhrkal
Steffen Kuhn
FAAS, Denmark
[email protected] +45 2529 3921
FAAS, Germany
[email protected] +49 711 9881 14063
Craig Kennedy Treasury Services, UK
[email protected] +44 20 795 19026
EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2016 EYGM Limited. All Rights Reserved. EYG no. 00411-163Gbl BMC Agency GA 0000_04777 ED None
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