New changes to IFRS

PwC
Treasury Hot Topics
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Brussels – February 24th, 2011

Fm/flj/H/EACT/2007_bu
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20 NTAs are presently
E.A.C.T members
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www.eact.eu 3

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 Many decisions having a direct effect on the treasurer’s job are now
taken by European bodies (EU Commission, ECB, CESR, European
Parliament).
 It’s important to give treasurer’s opinions at these levels
 Treasurers associations in Europe decided to join their forces and to
create EACT
 Informal meetings from 1998
 EACT - Euro Association of Corporate Treasurers – set up in 2002
 B
Becomes European Association of C
E A i i f Corporate T
Treasurers in 2004
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 Semestrial meetings
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E.A.C.T
EACT  More than 8.500 members
 +/- 4700 corporates

Objectives  To develop and strengthen relations with European and
International Authorities and Institutions.
 To share experiences, express common points of views,
undertake joint actions on financial and treasury matters as
well as relationship with financial partners.
 To carry out and publish common surveys and working on
white papers
 To lobby all decisions bodies acting on treasury matters
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Objective is to serve and support our members

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 EACT is a grouping of national associations representing treasury
and finance professionals

 Speaking with a united voice, the EACT creates a greater impact
than the sum of its individual component actions. This gives
prominence to the issues faced by treasury and finance
professionals across Europe with the European authorities,
national governments, regulators and standard-setters.
 Together we promote the value of treasury skills through best
practice and education. We ensure that the treasury role
continues to evolve as an essential component within a dynamic
financial environment.
fi i l i t
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The third episode… the most exiting
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May the force blows your mind?
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 4 Objectives of the IASB hedging project
1. “To improve the decision-usefulness of financial statements for
1 To decision-
users by fundamentally reconsidering the current hedge accounting
requirements”
2. To entity s
2 “To represent in the financial statements the effect of an entity’s
risk management activities that use financial instruments to manage
exposures arising from particular risks that could affect profit or loss”
3. Better link to risk management and purpose for entering into a
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derivative
4. Many of the prohibitions/rules in IAS 39 proposed to be removed
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1. The
1 Th HA model proposed i th ED provides a number of significant
d l d in the id b f i ifi t
improvements that should make HA easier.
2. EACT also acknowledges that the objective of reflecting in financial for
corporate treasurers reporting the extent and effects of preparers’ risk
management strategies is good and even necessary.
3. The approach of IFRS 9 tends to be more principle-based (which was an
objective earlier expressed by the Board of IAS and requested by EACT
through FIWG).
4. However EACT is of the opinion that there are few
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issues in the current proposal that it wants to officially
comment.
5. Some o t e measures proposed should add a higher
So e of the easu es p oposed s ould g e
degree of complexity (e.g. rebalancing of HR,
treatment of TV of option, additional disclosures and
figures gross-ups, etc.).
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6. Examples of improvements welcomed b EACT
E l fi l d by
 e.g. relaxing assessment of hedge effectiveness
 e.g. possibility to designate derivatives, risk components and net
positions as h d d i
ii hedged items
 Possibility to apply HA to components of the non-financial items

It will make HA significantly more flexible (even if
sometimes more complex too)

EACT is not necessarily convinced H.A. use will
be i
b increased with new measures proposed
d ith d
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 EACT agrees on the idea that disclosures play fundamental role i
h id h di l l f d l l in
complementing financial information derived from a more principle-
based and judgemental approaches proposed by IASB. It also agrees on
more judgemental approaches.
However, it also underlines the additional workload for preparers and risk
of disclosing highly sensitive information, which can give competitive
advantages to competitors about hedging strategies
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 In short, EACT wants to make sure measures proposed:
 Really simplify HA
 Are not inconsistent with usual risk management practices and strategies applied
by corporate treasurers
 Are converging further towards US GAAP (Northwalk Agreement)
 Are more principle-based
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 It should improve significantly information for user and allow better
understanding of corporate strategies.
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 Welcome the IASB’ project to improve and simplify IAS 39 and
W l h IASB’s j i d i lif d
undertake a fundamental review of the standard.
 IAS 39 has widely been regarded as unduly complex and often
leading to unrepresentative accounting outcomes
outcomes.
 We believe that hedging is an economic activity and that hedge
accounting should be designed to reflect the economic reality of
risk management
management.
 IAS 39 hedging is rule based whereas IFRS 9 is /should be, in
general, principle-based.
 Many of the rules related to hedge accounting were drafted to
How to tie an IFRS
prevent abuse. We believe that these strict anti-abuse provisions
nine knot?
encourage constituents to structure transactions to avoid running
afoul of these rules.
 As a result, the treasury community has experienced a worrying
trend in recent years, of risk management activities often being
structured sub-optimally to fit within the strict guidelines of IAS
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39.
39

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 In ddi i
I addition, compliance requires significant time and effort which i
li i i ifi i d ff hi h is
disproportional to the benefit obtained.
 Although we recognize that there have to be controls over the
application of HA, we believe that this control would best be
HA
accomplished through use of professional judgment rather than rules-
based standards.

• However, EACT agrees with the objectives of the Board.
• IASB had taken the right approach not to start with a blank
page, but focused on patching up the current framework.
• In general the changes proposed are welcomed, as they bring
accounting closer to the risk management strategy of non-
financial companies and simplify hedge accounting rules.
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1. Qualifying for HA – the “unbiased” concept – a new approach

2. Hedged items – components of non-financial items

3. Hedged items – groups and net positions

4. Hedge with options

5. Presentation and disclosures
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 Voluntary de-designation prohibited (when all the qualifying
de-
criteria are still met)
EACT ddoes not agree with the proposed prohibition on d d i
ih h d hibi i de-designation f the
i for h
following reasons:
 This is not in line with current risk management market practice as for example
when a company enters into a cash flow hedge for forecasted sales in FX. As the
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aim of risk management strategy is to protect its cash flows, the hedging horizon
would be until settlement of the invoice. However, HA would only be applied
until the moment the sales invoice becomes an on B/S item, after which the
company obtains a natural offset in the income statement through the
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revaluation of both hedged item and hedging instrument.
 EACT feels that this rule could be circumvented by applying the strategy of
taking an opposite derivative position, and applying hedge accounting on the
whole structure. Hence we do not see the benefit of this prohibition.
 EACT members have difficulty in applying this concept to situations of net
investment hedges.
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There is a general consensus among our members that de-designation
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flexibility is needed and required to align closely to the risk management strategy.

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 Mandatory B l
M d Balancing
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EACT members are very pleased that the arbitrary 80-125% rule is to be removed;
however it is felt that it is unnecessary to introduce a mandatory rebalancing, for
the following
th f ll i reasons:
 This represents a lack of confidence in risk management, whereas the risk
management strategy and results need to be disclosed in the financial
statements and defended towards auditors and investors
 Rebalancing is the core responsibility of risk management, which is a respectable
profession with applicable standards and controls in place
 This will not be equal for every company, as each of them has to deal with
different circumstances
 If a company were to rebalance, this would mean in practice a need to reclassify
from ineffectiveness into trading, which would give the same result
 If a company were to set the optimal ratio incorrect, the resulting
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ineffectiveness would need to be recorded in the income statement anyway
 EACT believes that it would increase complexity. How to define the optimal
ratio? Different risk managers, will reach different conclusions, as this is not a
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matter of facts but based on interpretations and differing models or views of
facts,

the market. Another example would be on how to deal with a gradual change in
hedging ratio?
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 Calculation of ineffectiveness using discounted spot
In general EACT agrees with the need to include time value in the
ineffectiveness calculations; however this should not be made
mandatory.

According to our members, this would give rise to unnecessary
ineffectiveness in some circumstances e.g. when using short term rolling
forward contracts whereby the intent is to hedge the undiscounted
spot component, but not the interest component. Therefore, we would
propose to allow the use of undiscounted spot in some circumstances.
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 “Separately identifiable” and “reliably measurable”

 EACT is very pleased with the proposed changes. In terms of the
changes
eligibility of the implicit risk, it is proposed that each company should be
able to decide whether an implicit risk is an eligible hedge item, based
on the link/correlation and overall risk management strategy.
 However it should also be required to provide sufficient disclosures on
this in the notes to the financial statements, and therefore enable users
to understand the nature of the strategy. As a result, the assumption
would also b th t th h d relationship would b 100% effective, and
ld l be that the hedge l ti hi ld be ff ti d
that, to be consistent with the risk management strategy, the hedging
result should be taken when the hedged item affects the income
statement.
 This simple and pragmatic approach is proposed because it is difficult to
imagine a way to determine any ineffectiveness on the hedged implicit
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risk.

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 Layers
 We are positive about the IABS’s proposed changes.

 Designated component must be less than or equal to the
total cash flows
 EACT disagrees with this restriction. We believe that if the
restriction
components are present, they should be entitled to the same
hedging possibilities. In instances where a commodity is
quoted or priced at a discount to the futures price, the
exchange-traded amount should still qualify as a component
which can be hedged.
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 Income statement presentation
 EACT does not agree with the proposed changes, as it believes this leads
to misleading/meaningless numbers in the income statement. It is
proposed to gross up the result in a manner similar to creating synthetic
derivatives. This would be the only way to truly reflect the risk
management rationale behind hedging sales and purchases on a net basis.
Furthermore, this approach ensures conceptual alignment with the
hedging of a gross group of dissimilar items (which also includes opposite
movements), where here it would be acceptable to gross up the result.
 Same period
 We disagree with the proposed changes, as we believe the focus should be
on the cash flow period and not on the P&L period. Any restriction in
periods would create a restriction on hedge accounting which in no way
reflects the risk management strategy
strategy.

EACT welcomes the proposed changes, however it believes they
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do not go far enough as most cases of net position hedging are
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related to the hedging of sales and purchases in foreign
currency, which typically does not occur in the same month.
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 It is agreed that these are positive changes, as they brings IFRS closer to
US GAAP. EACT members agree with the fact that the premium has to be
reflected in the underlying whether it is sales, purchases or interest. For
period-related hedges, it was felt that the correct period for amortization
is the entire life of the debt (in the case of a cap or collar), without
taking into account certain fixing moments. In terms of transition period,
EACT would encourage more clarity (e.g. to amortize th OCI over th
ld l it ( t ti the the
lifespan of the underlying).
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 Fair Value Hedge model
We do not see the benefits of grossing up OCI for the following reasons:
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 In spite of helpfulness of more comprehensive disclosures, it is not
useful for investors to have this information on the face of the balance
sheet
 This approach adds unnecessary complexity

 Cash Flow Hedge model – mandatory basis adjustment
EACT does not agree that this should be made mandatory. Mainly for
operational reasons it would be preferable to allow the current choice
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(e.g. inventory systems are not designed to deal with this adjustment).
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 Cash flow hedge model – recycling out of equity
 This is not considered a useful change, as it adds unnecessary
s s ot co s de ed use ul c a ge, t u ecessa y
complexity. According to our members, equity is meant for
transactions with owners and should hence not be mixed.

 Disclosures
 There is a general concern regarding the disclosure of
commercially sensitive information. Many EACT members believe
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such disclosures, including those on risk exposures, whether
hedged or not, should be part of a broader project on risk
management in more general terms, rather than financial risks
only. EACT representatives would lik t offer t work t g th
l t ti ld like to ff to k together
with investors and the IASB to come to a suitable solution to help
disclose the appropriate level of detail on the risks, risk
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exposures and risk management.
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10 years under IAS 39…
celebration or funerals?
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Thank you !

F. Masquelier F. Masquelier
RTL Group ATEL
SVP Treasury, Corporate Finance & Chairman
ERM
45, bld Pierre Frieden 45, bld Pierre Frieden
L-1543 Luxembourg L-1543 Luxembourg
Francois.masquelier@rtlgroup.com www.atel.lu

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