Understanding and mastering IFRS and IAS standards

Origins of the IFRS standard

International accounting standards were created to ensure the transparency of the accounts of listed companies and adhere to three main principles:

• Completeness: Financial statements must reflect the company's activities and eliminate off-balance-sheet information.

• Comparability: Financial statements are standardized and identical for all companies.

• Neutrality: Standards must not allow companies any leeway in managing their accounts.

IFRS evaluation methods for financial elements

IFRS standards allow different evaluation methods. Two approaches are commonly used:

• The historical cost method

• The fair value method

Accounting for financing: Amortized cost & fair value [IAS 32/39]

The accounting for financial liabilities according to IFRS standards depends on how they will be removed from the company's balance sheet. They favor the use of the historical cost evaluation method for liabilities held until maturity.

For liabilities that may be removed from the balance sheet before their contractual maturity [Available for sale], the IASB recommends recording at fair value. This fair value must reflect the rate variation between its signing date and the accounting date. Over this same period, the credit risk evolution must also be recorded. This method inherently leads to greater volatility of the liability on the balance sheet.

Accounting for interest rate and currency derivatives [IAS 39]

IFRS and IAS 39 standards require the accounting of hedging derivatives at their fair value. To mitigate the result volatility due to fair value variations of derivatives, IAS 39 allows the implementation of exceptional accounting: hedge accounting.

Hedge accounting is exceptional and can only be applied if the following three conditions are met:

• Existence of documentation

• Eligibility criteria for the hedged item and the hedging instrument

• Demonstration of the effectiveness of the hedging relationship

Sensitivity of financial expenses & valuation [IFRS 7]

Companies subject to IFRS standards are required to evaluate the nature and extent of risks arising from financial instruments in their portfolio at the closing date.

Fair value evaluation of interest rate and currency derivatives according to IFRS 13

IFRS 13 introduces a new definition of fair value for interest rate and currency hedges. It defines fair value as the price that would be paid to transfer a liability or sell an asset in a transaction between market participants at the valuation date.

Companies applying IFRS standards must disclose an exit price for their derivative instruments, including the credit risk of counterparties, at each closing.

IFRS 9 – Expected developments

IFRS 9, which will eventually replace IAS 39, will be mandatory in Europe from January 1, 2018 (subject to its approval by the European Union).

For financial liabilities, this new standard will provide much more flexibility in terms of hedging strategy. It aims to integrate current corporate practices in managing interest rate and currency risks. In return, more extensive documentation will be required.

Towards IFRS 16

From January 1, 2019, IFRS 16, known as "Leases," will come into force. This new standard replaces IAS 17 and introduces the obligation to recognize all lease contracts (finance leases and operating leases) on the balance sheet, provided their term is at least one year (with a possible exemption for small contracts).

The Finance Active approach

For over 10 years, Finance Active has been supporting corporate finance departments with IFRS issues related to the accounting of their financial liabilities. Our IFRS offering is based on two areas of expertise:

• Technological expertise: Our interest rate and currency solutions allow you to value, simulate, and automate the accounting processes of your financial elements.

• Consulting expertise: At each stage, our consultants assist you in implementing and producing your IFRS statements.

Custom support during implementation, production of regulatory statements, monitoring and discussions with auditors... Throughout the value chain, Finance Active supports you, enabling you to focus on what matters most: your core business.