Treasury Hot Topics Seminar
IAS 39 : the road ahead
19 February 2009
PwC
Agenda
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Introduction
Impact of the financial crisis on accounting for financial instruments
(IAS 39, FAS 133, etc)
What’s next?
Conclusions
Introduction
PricewaterhouseCoopers
Slide 3
Introduction
What has changed in 2008
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Developments under IFRS:
- Hedging portions of risk:
• Prohibition of time value of options
• Prohibition of inflation component of a fixed rate debt
- Net investment hedging
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Developments under US GAAP:
- SEC’s elimination of the reconciliation requirement for FPIs reporting
under IFRS
- FAS 157: Fair value measurement concepts
- FAS 159: Fair value option
Introduction
Bridging the GAAP
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In October 2002, the FASB and the International Accounting Standards
Board (IASB) announced the issuance of a Memorandum Of
Understanding ("Norwalk Agreement"), marking a significant step toward
formalizing their commitment to the convergence of U.S. and international
accounting standards
PricewaterhouseCoopers
Slide 5
Introduction
Increasing IFRS use
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More than 100 countries have adopted IFRS.
PricewaterhouseCoopers
Slide 6
Introduction
US moving to IFRS
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History
SEC: proposed in Aug 08 roadmap towards IFRS for domestic companies
The end of US GAAP?
What if the US moves to IFRS?
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Slide 7
Introduction
FASB/IASB Joint Projects
11 projects where the Boards are currently working jointly on areas identified
for improvement in IFRS and US GAAP:
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Financial Instruments: IASB -> DP and FASB -> ED
Fair Value project: FAS 157 and IASB DP
Derecognition: discussions ongoing
Liabilities and equity: discussions ongoing
FS presentation: IAS 1 revised; discussions ongoing
Business Combinations: project completed (FAS 141R and IFRS 3
revised)
Intangible assets: inactive
Leasing: discussions ongoing
Revenue recognition: discussions ongoing
Consolidation: discussions ongoing
Post employment benefits: FASB completed and IASB DP
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Slide 8
Agenda
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Introduction
Impact of the financial crisis on accounting for financial instruments
(IAS 39, FAS 133, etc)
- Amendment on reclassification
- FV concept
- Credit risk
- Importance of IFRS 7
- Impact on Hedging
- Derecognition
What’s next ?
Conclusions
PricewaterhouseCoopers
Slide 9
Impact of the financial crisis on accounting for financial instruments
Amendment on reclassification
FASB and IASB have set up the “Financial Crisis Advisory Group”
PricewaterhouseCoopers
Slide 10
Impact of the financial crisis on accounting for financial instruments - Amendment on reclassification
Reclassification
Why amend IAS 39 ?
To create a level playing field between US GAAP and IFRS.
“We underline the necessity of
avoiding any distortion of
treatment between US and
European banks due to
differences in accounting rules
...the issue of asset
reclassification must be resolved
quickly… We expect this issue to
be solved by the end of the
month.”
“The amendments today address
the desire to reduce differences
between IFRSs and US GAAP.”
IASB press release 13 October
2008
ECOFIN Council 7 October 2008
PricewaterhouseCoopers
Slide 11
Impact of the financial crisis on accounting for financial instruments - Amendment on reclassification
IAS 39 – Categories of Financial Instruments
Category
Assets
FV through
P/L
Trading
Designated
Loans and receivables
Held-to-maturity
Liabilities
Available-for-sale
FV through
P/L
Trading
Designated
Other financial liabilities
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Measurement
Fair value
(FV changes in P/L)
Amortised cost
(effective interest method)
Amortised cost
(effective interest method)
Fair value,
FV movements to equity
Fair value
(FV changes in P/L)
Amortised cost
(effective interest method)
Comments
E.g. trading securities,
derivatives
At inception and
irrevocably
Incl. purchased loans not
traded
Watch for “tainting rules”!
Residual category
E.g. short securities
positions, derivatives
At inception and
irrevocably
All non trading and not
designated fin. liabilities
Slide 12
Impact of the financial crisis on accounting for financial instruments - Amendment on reclassification
What does the amendment entail ?
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Permits reclassification of certain non-derivative financial assets out of the
held for trading category in rare circumstances, if asset is no longer held for
purpose of selling or repurchasing in near term (IAS 39 §50C)
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Permits reclassification of certain financial assets that would have met the
definition of Loans and Receivables (prior to reclassification) out of the
Available-for-sale category to the Loans and Receivables category if the
entity has the intention and ability to hold the financial asset for the
foreseeable future or until maturity (IAS 39 §50E)
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Slide 13
Impact of the financial crisis on accounting for financial instruments
Fair Value concept
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Slide 14
Impact of the financial crisis on accounting for financial instruments – FV concept
Fair value concept some quotes
“IAS 39 is criticised for being complex. There is a simple alternative that has only two sentences.
First, measure all financial instruments at fair value. Second, re-read the first sentence.”
Sir David Tweedie (IASB)
“Is the naïve, across-the-board application of mark-to-market accounting suitable for regulated
institutions? … The lumping of illiquid and liquid assets and liabilities into a single valuation
system has resulted in a “forced fit” of currently untraceable instruments into methods applicable
only to easily traded ones.”
Paul Volcker (top economic advisor of Obama)
“A review of fair value accounting is required to improve its consistency with prudential rules.”
Nicolas Sarkozy
“It was not fair-value accounting that worsened the credit crisis, but rather a capital markets house
of cards built on complex and risky securitization structures linked to subprime mortgages.”
Robert Herz (FASB)
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Slide 15
Impact of the financial crisis on accounting for financial instruments – FV concept
FAS 157 : Fair Value Measurement Concepts
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FAS 157 introduces several concepts which should be considered when
determining fair value measures:
- Fair value is an exit price
- Principal vs. Most Advantageous Market
 Recognizes that fair value may differ between market participants
based on market access
- Fair value hierarchy
 Quoted prices in active markets (L1)
 Quoted prices for similar instruments (L2)
 Unobservable inputs (i.e. assumptions made by entity) (L3)
 > Disclosures required for level used for each major class of
asset/liab + extensive disclosure for Level 3 category.
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Slide 16
Impact of the financial crisis on accounting for financial instruments – FV concept
The fair value option : differences
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IFRS
An entity can designate all of its financial assets and liabilities at fair value
and include the fair value changes in the income statement if it results in
more relevant information because either:
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it eliminates or significantly reduces a measurement or recognition
inconsistency;
a group of financial assets, financial liabilities or both is managed and
performance is evaluated on a fair value basis; or
the contract contains one or more substantive embedded derivatives
US GAAP
SFAS 159 introduces the option to designate financial assets and liabilities
at fair value through profit and loss. Unlike IFRS, the new guidance does
not require meeting specific criteria.
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Slide 17
Impact of the financial crisis on accounting for financial instruments
Credit risk
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Slide 18
Impact of the financial crisis on accounting for financial instruments – Credit risk
Credit risk
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Strengthen policies and monitoring
Valuations: acceptable and understandable methodology and tool to
incorporate credit risk in valuing derivatives
Included in effectiveness testing of hedge relationships
Factors to consider: netting agreements, collateral, margin calls
In practice:
Add CDS spread to discount rate or apply probability of default
(derived from CDS spread) to future cash flows
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Slide 19
Impact of the financial crisis on accounting for financial instruments
Importance of IFRS 7
“Now especially, investors need comparability and transparency, not further
uncertainty and inconsistency” - Financial Times, 21 October 2008
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Slide 20
Impact of the financial crisis on accounting for financial instruments – Importance of IFRS 7
Importance of IFRS 7
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Financial risk disclosure (market risk, liquidity risk, credit risk)
- Treasury policies should be updated
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Latest amendment
- Additional disclosure and transparency needed on:
 Liquidity risk
 Fair value measurement
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IFRS 7 requires a lot of manual work
- Time to consider to embed this into your system
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Slide 21
Impact of the financial crisis on accounting for financial instruments
Impact on hedging
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Slide 22
Impact of the financial crisis on accounting for financial instruments – Impact on hedging
Impact on hedging
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Cash flow hedges: decrease of budgeted sales or purchases as a result of
the financial crisis
- overhedging
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Credit risk to be included in hedge effectiveness testing
PricewaterhouseCoopers
Slide 23
Impact of the financial crisis on accounting for financial instruments
Derecognition
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Slide 24
Impact of the financial crisis on accounting for financial instruments – Derecognition
Derecognition
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Heightened scrutiny as a result of the financial crisis
- estimated credit risk might be affected
- need to reconsider
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New ED expected in Q1, 2009
PricewaterhouseCoopers
Slide 25
Agenda
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Introduction
Impact of the financial crisis on accounting for financial instruments (IAS
39, FAS 133, etc)
What’s next?
- DP : reducing complexity in financial reporting
- FAS 133 upcoming amendments
Conclusions
PricewaterhouseCoopers
Slide 26
What’s next
Discussion Paper :
Reducing complexity in financial instruments
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Slide 27
What’s next? – DP : reducing complexity in financial instruments
DP : reducing complexity in financial instruments
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Discussion paper published 19 March 2008
Comments due 19 September 2008
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Background: IASB & FASB convergence project
FIWG Treasurers paper on Simplifying Hedge Accounting
Current different measurement methods for financial instruments
PricewaterhouseCoopers
Slide 28
What’s next? – DP : reducing complexity in financial instruments
Longer term solution
All financial instruments at FV!
How using fair value for all types of financial instruments could reduce
measurement related complexity
Component of standard
How complexity would be reduced
Classification
Not required
Impairment
Not required
Transfers between categories
Not required
Fair value hedge
Not required for financial instruments; perhaps FVH
for non-financial instruments
Cash flow hedge
Embedded derivatives
Retained
Not applicable for financial instruments; may still be
required for non-financial instruments
PricewaterhouseCoopers
Slide 29
What’s next? – DP : reducing complexity in financial instruments
Longer term solution
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Main concerns relating to long term solution are:
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Volatility of earnings with changes in fair value
Presentation of unrealized gains/losses in earnings
Difficulty and uncertainty of measuring financial instruments where no
market-based information is available
PricewaterhouseCoopers
Slide 30
What’s next? – DP : reducing complexity in financial instruments
Intermediate approach
Two possible approaches to reducing complexity:
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Amend existing measurement requirements
- Remove HTM or AFS categories
- Require FVTPL for all financial instruments traded in active markets
- Simplify requirements (eg remove tainting rules for HTM)
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Replace existing measurement requirements with a FV measurement
principle with optional exceptions (eg for instruments with fixed or slightly
variable cash flows)
PricewaterhouseCoopers
Slide 31
What’s next? – DP : reducing complexity in financial instruments
Hedge accounting
Possible ways to reduce complexity caused by hedge accounting
requirements:
1.
2.
3.
4.
Eliminate hedge accounting entirely
Replace fair value hedge accounting with a less complex method to
remedy measurement anomalies
Maintain and simplify existing hedge accounting requirements
Reduce flexibility in hedge accounting:
Some of these proposals are similar to the recent proposals in the FASB
Exposure Draft
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Slide 32
What’s next?
FAS 133 upcoming amendments
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Slide 33
What’s next? – FAS 133 upcoming amendments
Effective Date
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The Board’s goal was to issue a final statement by
December 31, 2008 => redeliberations
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Applicable for financial statements issued for fiscal years beginning after
June 15, 2009, and interim periods within those fiscal years> January 1,
2010 for calendar year companies
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Early adoption not permitted
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Slide 34
What’s next? – FAS 133 upcoming amendments
What is going to change?
Hedge effectiveness
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Eliminate the shortcut method and critical terms matching.
Modify the effectiveness threshold necessary for applying hedge
accounting from highly effective to reasonably effective at offsetting
changes in fair value or variability in cash flows.
Dedesignation of the Hedging Relationship
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An entity shall not have the option to remove the designation of the
hedging relationship after it has been established unless the derivative is
terminated or hedged item is gone, or the relationship is disqualified from
hedge accounting
PricewaterhouseCoopers
Slide 35
Agenda
•
•
•
•
Introduction
Impact of the financial crisis on accounting for financial instruments (IAS
39, FAS 133, etc)
What’s next?
Conclusions
PricewaterhouseCoopers
Slide 36
Conclusion
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More changes to come …
The important message is to stay tuned!
Opportunity to voice the Treasurers’ views
PricewaterhouseCoopers
Slide 37
Thank you!
Olivier Cattoor
Olivier.cattoor@pwc.be
+32 2 710 4118
Kristof De Smedt
Kristof.de.smedt@pwc.be
+32 2 710 9628
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