Published: February 01, 2011
The ten years of IAS 39 have changed our lives as treasury managers. We have been involved with and using ‘hedge accounting’ for so many years that we have almost forgotten the days of local GAAP that went before it. In this article, we want to make some comments on the future IFRS 9 but also put together some of the thoughts of practitioners, treasury managers and academics on this financial instrument accounting standard that has revolutionised the way we carry out treasury management.
Whatever IFRS 9 may come up with when its final and definitive version is released – expected in the second half of 2011 - no treasury manager can claim that IAS 39 has not changed his work and his methods of managing risk and using derivatives. As a natural optimist, I would even be tempted to talk of celebration rather than commemoration. IAS 39 has, in one way or another, changed all our lives as treasury managers, bankers or service providers (and not always for the good, some critics among us might say). Let’s think back to what we did before January 2001 and the type of derivative products that we dealt in then. Our derivative instrument portfolios have been considerably simplified and the most structured and most leveraged products have become fewer. We have become real mini-accountants and financial reporting specialists (see IAS 32 - IFRS 7). Could IAS 39 have perhaps brought us closer to operational activities and made us speak to the accountants more than we used to? In any case, no one can claim that IAS 39 has not had a major effect on our profession and our suppliers!
IAS 39 and its offspring IFRS 9, whose impending arrival we await, are not just accounting standards - they almost represent a way of life. We have got used to this standard. We may have disliked it or even loathed it. We may have fought against it through the treasury associations and all of us have no doubt begged for some aspects of it to be changed, with greater or lesser success. We even hoped that the IASB would reduce its complexity (www.iasb.org). It has been one of the major challenges for treasury managers over the last ten years, and particularly since 2005, when IFRS was made mandatory for listed companies within Europe. IFRS 9 will still be complex, we are quite sure of that. We will still have the ‘hedge accounting’ exception for quite some time. In fact we now think that IFRS 9 may turn out to be a damp squib in spite of its long gestation period. But at the end of the day, is this not a manifestation of the wish of the majority to keep hold of what they have finally managed to bring under control and tame?
When IFRS 9 is adopted, we will still have to wait for convergence with the US standards, US GAAP, another major challenge set by the G20.[[[PAGE]]]
Well done all of you who have survived IAS 39 for all these years and who have practised hedge accounting! We’ve had to change, to adapt our IT systems and programmes, to invest in solutions for re-evaluating our financial instruments and for carrying out stress-testing. We’ve also had to modify all our internal procedures and sometimes even our hedging strategies and policies. The greatest paradox is that accounting has often taken priority over treasury management by, prior to dealing in any financial instrument, requiring consideration of its impact and accounting effect on the income statement, rather than the risk that it was intended to guard against. The accountants have no longer remained on the sidelines and their complex standards have reformulated the approach to risk management. Today, a treasury manager can no longer think only in financial terms, he must also think of the accounting effect and the implicit and potential volatility of the instrument in which he plans to invest. Finally, it comes as a big surprise that ‘IFRS’ which represents a set of accounting rules, made up of the letters R for Reporting and F for Financial, makes no reference to any A for Accounting, as if it wanted us to forget that in fact accounting rules are really what it is all about.
When IFRS 9 is adopted, we will still have to wait for convergence with the US standards.
The goal of IFRS 9 was to simplify and improve the standard on financial instruments and provide convergence between IAS 39 and FAS 133. After the start of the financial crisis, one of the recommendations of the G20 in London was that these two standards should be fundamentally re-examined and made convergent to give greater transparency and comparability for users.
Since IAS 39 was too rigid and unsuited to such a crisis, the IASB has had to modify it significantly. In any case, in the mind of the Board (i.e., IASC—> IASB), IAS 39 had always been a temporary measure, intended to be replaced in time by a Full Fair Value (FFV) approach.
Even before the crisis, we may recall what Sir David Tweedie said when he was talking to British treasury managers: “Don’t complain about the standard, help us fix it”. It was for that reason that as far back as 2008 the ‘Group of Four’ at the FIWG (Financial Instrument Working Group) put forward a nine-page document (‘Simplifying Hedge Accounting, a holistic alternative model to accounting for financial risk management’). When we read the document published by the Board in March 2008, we thought that it would find greater resonance among its members, but we are now reaching the third phase of the IFRS 9 trilogy (i.e., ‘Hedge Accounting’) after a long process lasting three years. The members of the Board considered this to be a huge undertaking, while others external to the debate thought that it was squaring the circle or an almost impossible task. Convergence has certainly proved to be far from being easy or straightforward, perhaps even impossible, and IAS 39 is now only a short or medium-term solution. The aim of both Boards is therefore to be more ‘principle-based’ than at present.[[[PAGE]]]
The IASB wanted to make IFRS 9 (in general) more principle-based. However there are doubts as to whether this is the way they will go.We know the Board’s habitual suspicion concerning ‘risk management’ strategies. They are continually concerned about abuses and implement various ‘anti-abuse’ measures to prevent and avert abuse as much as possible, to the point of becoming overly prescriptive and ‘rule-based’.
To change its approach, the IAS Board needs to stop always envisaging the worst abuses or excesses on the part of treasury managers - most of them do not speculate at all, unlike bankers. We therefore do not think that IFRS 9 (final version) will truly be a simplification and more principle-based than rule-based.
At the end of the day, treasury managers should be pretty happy about keeping the fundamentals of IAS 39 in the new IFRS 9. We might be talking of tweaks and fine tuning rather than a complete review of principles, as had been announced and claimed at the outset.[[[PAGE]]]
IAS 39 will celebrate its 10th birthday on 1 January 2011. It is also the year in which the IASB will modify this standard which, we can safely declare, is and will remain the most complex of the IAS/IFRS accounting standards (as is FAS 133 in US GAAP). Let us look back at the positive aspects of all those years of IAS 39 and be proud of how far we have come. Treasury management has certainly become both more virtuous and more sophisticated. Whether we like it or not, this accounting standard has revolutionised our lives as treasury managers, although it’s up to you to decide if it has been for better or for worse. At least we can conclude, as Vauvenargues used to say, “Necessity relieves us from the embarrassment of choice”.
Special thanks for all quotes received from IAS 39 specialists.
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