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Opening up new hedging opportunities for corporates: IFRS 9

11/10/2018

Interview with Pascale Moreau, Global Head of Corporates Fixed Income & Currencies Sales

What is IFRS 9 and why is it important?

 

IFRS 9 is a new financial accounting standard which came into effect on the 1st January 2018. Its new hedge accounting rules allow corporates more freedom to align their risk management hedging strategy more closely with their own business objectives, and will have a huge impact for corporates around the world.

The objective of hedge accounting is to represent the effect of risk management activities, using financial instruments, in a company’s financial statements to manage exposures arising from specific risks that could affect profit and loss (P&L).

Under IFRS 9, companies are no longer required to register the gains or losses of equity instruments in the P&L.

 

Why have the regulators brought these changes in?

The financial crisis of 2007-2009 illustrated the weakness of the previous accounting rules - IAS39. Due to their complexity, and the restrictions they put on corporates, requiring them to register an instrument’s volatility in the P&L, many had left their risks unhedged leaving them very exposed.

The regulators saw that the previous accounting rules were poorly adapted to the activities of corporate enterprises. The G20 called for the convergence of the International Accounting Standards Board (IASB) and the United States’ Financial Accounting Standards Board (FASB) with the aim of building together a new accounting standard for financial instruments and bringing more transparency to credit risks.

What is the significance for corporate clients?

No longer beholden to restrictive accounting rules, corporates are now able to reconcile their economic vision with accounting. Up until this point, the two were in conflict. Economic considerations were a hostage to accounting considerations in the sense that they were the main driver when it came to choosing hedging instruments or whether to hedge at all.

In today’s complex markets, the needs of corporates can vary significantly according to sector, geography and market conditions. The new rules make it easier for them to implement tailored risk and debt management strategies more efficiently.

What do the new rules allow corporates to do in practice?

The main advantage for corporates is the increased flexibility. Once you have removed the constraints around accounting for hedge instruments, many more options open up for corporates. By hedging their different risks properly or more efficiently, be it risks on debt or FX risk in revenues, assets or dividends, they can help to drive profits for the business.

Cashflow hedging is a good example. Corporate clients export goods and services and may have several entities in countries around the world. They receive revenues in foreign currencies which they want to switch back into their domestic currency. Under the new rules, this kind of risk can be hedged using FX options in cashflow hedge mode. Previously, the time value of the options needed to be registered in the company’s P&L. They were effectively required to separate the time value from the fair value of the option. It was a huge disincentive for corporates to use cashflow options at all.

IFRS 9 opens a whole new world of hedging opportunities and strategies that I can’t all list here. I strongly advise corporates, and especially corporate treasurers to get in touch with their banking partner to explore options!

How can Societe Generale help its clients make full use of this new standard?

Societe Generale is committed to strategic dialogue and long-lasting relationships with our corporate clients. Our Global Markets platform provides a range of specialist solutions including delivering risk analysis, advice and implementation. Our approach is to accompany them by offering high level advisory and financing solutions that help them to achieve their corporate objectives. Identifying strategies that qualify under IFRS9 is key.

Find out more, read "FRS 9 versus IAS 39 Opportunities in changes to hedge accounting"