Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the September 2, 2008 issue of the Bangkok Post.
By Unakorn Phruithithada and Soo Hoo Khoon Yean
International Accounting Standard (IAS) 39, “Financial Instruments: Recognition and Measurement”, has caused many sleepless nights, and is likely to continue doing so for both financial institutions and corporations in Thailand. Considered to be a key milestone in the accounting world, it seeks to fully address the accounting issues of financial instruments which, more often than not, remain a mystery to many, accounting professionals included.
While IAS 39 is likely going to be effective in Thailand from 1 January 2011, our observations show that many people continue to have misconceptions about IAS 39. Such "myths" include:
Myth 1 - It relates only to financial derivatives. This is not true. The definition of financial instruments covers a wider scope than derivatives alone. Even trade debtors, investment in shares, and debt come within the ambit of IAS 39. Many companies in Thailand will be affected, although the impact will vary depending on the complexity of one’s business activities.
Myth 2 - It does not affect our business. Few people realise that sale and purchase contracts may be "deemed" to be harbouring embedded derivatives, which under IAS 39, may now be required to be separately identified and measured at fair value. What this means is that there may be serious implications when one designs the clauses in sales contracts to cater to specific customer needs.
Myth 3 — Only the 'bean counters' should be worried about it. Rest assured that dealers in the treasury front office and financial engineers will fall off their chairs today if they were told that the "hedges" they had entered into previously will create volatility to the company's income statement, or that the securitisation structure will no longer meet the requirements of the new standards. IAS 39 documentation requirements may run into many pages for each hedge - this affects the risk management unit, and will demand extensive documentation management systems, which in turn affects the information technology division. To cope with the sheer volume, derivative fair values may potentially need to be updated daily to prove hedge effectiveness on an ongoing basis. Income volatility resulting from fair valuation of derivatives will attract enquiries from analysts - investor relations personnel need to be aware of and respond to this. Successful implementation of IAS 39 will require the combined efforts from within the whole organisation and not just the finance function.
Myth 4 — It is relevant only to the financial services industry. Impairment rules will not only affect loans on the banks' balance sheets, but also the likes of trade debtors and inter-company loans in corporations. As users of financial instruments offered by banks, corporations will need to prove the effectiveness of hedge accounting or obtain fair valuation. This is more than likely to create challenges for many finance functions in corporate environments due to the lack of appropriate infrastructure.
The challenges of IAS 39 implementation cannot be over-emphasised. Some areas of implementation are clearly a major undertaking, placing huge demands on availability of data, documentation and disclosure. However, we believe that the real challenge to IAS 39 implementation is this: It is not merely a technical accounting exercise, but rather a requirement to embed change and ensure that everyone in the organisation learns a new language, and a new way of working.
Some of the "non-technical" challenges companies will face in their quest for a successful implementation include educating non-finance personnel, reassessing treasury strategies, and managing market expectations.
Based on our experience, IAS 39 is a standard that can be a minefield for the unprepared. The extent of difficulty behind IAS 39 is dependent on the complexity of one’s business.
Time and time again, we are asked whether it is worthwhile to go through the "pain" of IAS 39. We believe that the merits of IAS 39 outweigh the cost of compliance. In fact, some companies are even keen to take on IAS 39 early. The fact that a company needs to reflect the economic effects of its financial instrument transactions will "force" those responsible to be fully aware of the economic and financial risks that the company is about to undertake. Moving forward, this will help them to make an informed decision as they approve financial instrument transactions.
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