Dear,
IFRS 9 implications go further than what many Banks and Corporates executives expect. For this reason, many Banks and Corporates are far from being ready to be compliant to IFRS 9, which is mandatory from January 1st, 2018.
A particularly interesting example is the management and Value Recognition of Account Receivable Open Items on IFRS 9.
According to IFRS 9 Accounts Receivable Open Items are classified as LAR (Loans and Receivables) and valuated at Amortized Cost using the effective interest method. Technically, this means to determine the Cost of Capital related to the Open Item (considering the Probability of Default of the Counter-party and Loss Given Default of the Exposure) and penalize its Nominal Value accordingly.
Remember that not only banks, but also publicly listed companies are subject to IFRS 9, which means that in 2 months they should have developed the Risk Models for determining the Probability of Defaults of their clients, and Loss Given Defaults of their Account Receivable Open Items.
Are they going to be ready on time? We’ll see.
But let’s look at the IFRS 9 implications from the Banks perspective.
Factoring is a very common Financial Service offered by Banks for the management of Account Receivables; with Factoring a Corporate “sales” its Account Receivable rights to a Bank in exchange for cash, which means that the Bank is taking the counterparty Risk and the Cost of Capital related to the Assets (Accounts Receivable Open Items).
Again, this means that in 2 months they should have developed the Risk Models for determining the Probability of Defaults of the counterparties of the acquired Account Receivables, and Loss Given Defaults of the related Exposures, so they can valuate the acquired assets at Amortized Cost, using the effective interest method. .
Are they going to be ready on time? We’ll see.
But the analysis becomes a little bit more complicated when we look carefully at the IFRS 9 implications for the acquired assets. If the Bank acquiring the assets has the positive intention to hold to maturity the acquired assets, they are classified as LAR and valuated at Amortized Cost (analogously as the corporate would), but if not, they must be valuated at Fair Value, which obviously brings new challenges to the Valuation of the acquired assets.
Once again, are they going to be ready on time? We’ll see.
On the other hand, there are two different Financial Services related to Accounts Receivable Open Items, one is the Factoring, that we analyzed above, the second one is Invoice Discounting.
With Invoice Discounting Financial Service, a Corporate borrows cash from a Bank, using its Account Receivable Open Items as Collateral of the Loan.
With Invoice Discounting, the Counterparty Risk remains in the Corporate and the associated Cost of Capital of the Account Receivable Open Items must be posted in the Corporate books. Additionally, the Corporate holds a liability (the money borrowed from the Bank) that must also be reflected in the Corporate books.
SAP offers a complete solution for the management of the Account Receivables Open Items and the Factoring and Invoice Discounting Financial Services related, combining FI-CA, Bank Analyzer and other modules, but this blog has become too long, we’ll talk about it in a future one.
Looking forward to read your opinions.
Kind Regards,
Ferran.
www.capitency.com
IFRS 9 implications go further than what many Banks and Corporates executives expect. For this reason, many Banks and Corporates are far from being ready to be compliant to IFRS 9, which is mandatory from January 1st, 2018.
A particularly interesting example is the management and Value Recognition of Account Receivable Open Items on IFRS 9.
According to IFRS 9 Accounts Receivable Open Items are classified as LAR (Loans and Receivables) and valuated at Amortized Cost using the effective interest method. Technically, this means to determine the Cost of Capital related to the Open Item (considering the Probability of Default of the Counter-party and Loss Given Default of the Exposure) and penalize its Nominal Value accordingly.
Remember that not only banks, but also publicly listed companies are subject to IFRS 9, which means that in 2 months they should have developed the Risk Models for determining the Probability of Defaults of their clients, and Loss Given Defaults of their Account Receivable Open Items.
Are they going to be ready on time? We’ll see.
But let’s look at the IFRS 9 implications from the Banks perspective.
Factoring is a very common Financial Service offered by Banks for the management of Account Receivables; with Factoring a Corporate “sales” its Account Receivable rights to a Bank in exchange for cash, which means that the Bank is taking the counterparty Risk and the Cost of Capital related to the Assets (Accounts Receivable Open Items).
Again, this means that in 2 months they should have developed the Risk Models for determining the Probability of Defaults of the counterparties of the acquired Account Receivables, and Loss Given Defaults of the related Exposures, so they can valuate the acquired assets at Amortized Cost, using the effective interest method. .
Are they going to be ready on time? We’ll see.
But the analysis becomes a little bit more complicated when we look carefully at the IFRS 9 implications for the acquired assets. If the Bank acquiring the assets has the positive intention to hold to maturity the acquired assets, they are classified as LAR and valuated at Amortized Cost (analogously as the corporate would), but if not, they must be valuated at Fair Value, which obviously brings new challenges to the Valuation of the acquired assets.
Once again, are they going to be ready on time? We’ll see.
On the other hand, there are two different Financial Services related to Accounts Receivable Open Items, one is the Factoring, that we analyzed above, the second one is Invoice Discounting.
With Invoice Discounting Financial Service, a Corporate borrows cash from a Bank, using its Account Receivable Open Items as Collateral of the Loan.
With Invoice Discounting, the Counterparty Risk remains in the Corporate and the associated Cost of Capital of the Account Receivable Open Items must be posted in the Corporate books. Additionally, the Corporate holds a liability (the money borrowed from the Bank) that must also be reflected in the Corporate books.
SAP offers a complete solution for the management of the Account Receivables Open Items and the Factoring and Invoice Discounting Financial Services related, combining FI-CA, Bank Analyzer and other modules, but this blog has become too long, we’ll talk about it in a future one.
Looking forward to read your opinions.
Kind Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
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