Economic outlook: Implications for financial reporting

Piyanat Suanapai
PwC Thailand Spotlight, insights on business and industry trends in Thailand and beyond.

Today, businesses face uncertainty from multiple directions—from the global economic climate and domestic economic conditions to geopolitical tensions that are driving up costs and making them more volatile. At the same time, issues such as household debt and tighter liquidity are affecting purchasing power. These factors are increasingly reflected in business performance, financial statements, cash flows, and strategic decision-making.

While executives and CFOs routinely monitor economic developments, the current environment requires even closer attention. What information should organisations be tracking, and how should they assess the accounting implications?

To discuss these issues, we’re joined by Sinsiri Thangsombat, Assurance Leader, PwC Thailand.

Hello Sinsiri.

Sinsiri Thangsombat
Hello.

Piyanat
Why is it especially important for CFOs to keep an eye on the current economic situation?

Sinsiri
From a CFO’s perspective, developments such as oil price fluctuations, geopolitical conflicts, inflation, and rising household debt are often viewed as broader macroeconomic trends.

Looking deeper, these factors really do affect organisations directly, whether in terms of asset values on the balance sheet, the organisation’s ability to meet its financial obligations, or even opportunities for further investment.

Piyanat
Given your experience working closely with CFOs and finance teams across many organisations, what financial reporting issues are emerging most frequently in today’s volatile economic environment?

Sinsiri
The key areas generally fall into two categories: assets and liabilities.

Looking first at assets, the discussions often centre on valuation. One key area is credit risk and the recoverability of trade receivables. Many organisations are reassessing whether their allowance for expected credit losses on trade receivables remains appropriate in light of current economic conditions.

Similar questions arise in relation to investments, because many listed companies hold investments in associates or subsidiaries. Companies often ask whether those investments need to be impaired.

In a volatile environment, some production lines may be partially suspended, while other companies may be expanding production. This also leads to questions about impairment testing—how should we test assets for impairment?

And when it comes to new investments, companies may ask whether they can capitalise borrowing costs as part of the asset cost.

On the liability side, there are questions around how to manage volatility in interest rates and foreign exchange rates. Can we use derivatives to manage that volatility? How should we account for them? These are the key questions on both the asset and liability sides of the balance sheet.

Piyanat
Looking ahead, are there any financial risks or accounting impacts that organisations should be paying close attention to?

Sinsiri
Yes. If we look at trade receivables, under TFRS 9, expected credit loss accounting requires us to consider both historical data and forward-looking information.

So, for receivables, you need to understand which customer segments you’re exposed to and which segments may carry higher risk. For example, you may be seeing challenges among SMEs or sectors facing liquidity pressure, such as real estate. That means you need to incorporate forward-looking factors when estimating expected credit losses and understand how these factors correlate with your receivables portfolio.

Another major area is volatility in interest rates and foreign exchange rates. If interest rates fluctuate, that can affect financing costs and cash flows, especially if a company has floating-rate debt. Likewise, if a company borrows in foreign currency, or has foreign currency receivables, exchange rate volatility can create fluctuations as well. That’s why using financial derivatives can help manage economic risk.

But at the same time, CFOs need to consider how to structure those instruments so that the financial statements don’t become unnecessarily volatile, while still reflecting the organisation’s risk management strategy. This is another area that CFOs need to study carefully.

Piyanat
Earlier, you mentioned receivables and customers who may face repayment issues. From a credit management perspective, where should companies start?

Sinsiri
The first step is to identify which customer segment the receivables belong to, and then analyse historical data to understand the credit characteristics of those customers. As I mentioned earlier, you may also need to look at forward-looking factors such as unemployment or GDP growth. The question is: how strongly do these factors correlate with your receivables portfolio?

You can then use that information, along with data from sources such as the Bank of Thailand or other statistics organisations, to support your expected credit loss model and determine the appropriate allowance for expected credit losses.

Piyanat
Another point you mentioned was using derivatives for risk management. Is that related to asset valuation?

Sinsiri
Not exactly. Derivatives are used for risk management.

Many companies already use them, but the real question is how they want to account for them. For example, if a company has foreign currency sales and wants to lock in the exchange rate using a forward contract to hedge the risk, that can help ensure that when payment is received from customers, the company already knows the Thai baht amount it will receive.

Similarly, if a company imports materials from overseas, it may use a forward contract to lock in its costs.

This kind of risk management is very common for companies that export or import goods. The key question is whether the company should apply hedge accounting.

Hedge accounting can help reduce volatility in the financial statements by better aligning revenue or cost recognition with the company’s risk management activities. That’s why it becomes an important discussion between finance, accounting, and treasury, and sometimes with banks as well.

In some cases, a company may have foreign currency debt or floating-rate debt and later decide to use derivatives to hedge those exposures. Even if the company doesn’t enter into the derivative on day one, it may decide later that hedging is appropriate. If so, hedge accounting can help reduce volatility in the financial statements and better reflect the organisation’s risk management approach.

Piyanat
So it’s essentially a tool for managing the company’s financial reporting risk? 

Sinsiri
Yes, and the accounting treatment helps ensure that the financial statements properly reflect the company’s underlying position.

Piyanat
Earlier, you also mentioned market volatility. I assume that this would also affect how businesses assess and value their assets. Is that correct?

Sinsiri
That is correct. We need to think about assets in two categories.

The first category is assets that already have a market price. If those assets are measured at fair value, then volatility in the market will directly affect the fair value measurement. That means changes may flow through profit or loss or other comprehensive income, depending on the accounting classification. This is something companies need to understand from the moment they make the investment.

The second category is assets that don’t have a market price but still need to be measured at fair value. In that case, volatility can affect the assumptions used in the valuation model, such as projected cash flows or the discount rate. Changes in those assumptions can affect the value of the asset.

Piyanat
It sounds like forecasting is becoming even more important for businesses.

Sinsiri
Yes, absolutely.

In the past, when the market was more stable, a single valuation scenario might have been enough. But in the current environment, events are much harder to forecast.

That brings us to the idea of resilience. Today’s environment is much more uncertain and varied. If we only use one cash flow scenario, the fair value of the asset may not be very close to the economic reality.

That’s why accounting standards now encourage the use of multiple scenarios in valuation, for example a best-case scenario, a base-case scenario, and a worst-case scenario.

Then we need to decide how to assign weights to each scenario, whether it’s 70/20/10 or some other weighting. This requires discussion and judgement, but it helps produce a valuation that is as close to reality as possible.

Piyanat
Listening to everything you’ve said so far, it sounds like there are more risks than opportunities for businesses right now. How should management look at this situation—as a risk or as an opportunity?

Sinsiri
I think it’s both.

If we think through the risks in advance, analyse them, and plan how to manage them, then those risks can actually become beneficial for the organisation.

At the same time, this may also be the right time to invest more or to pursue acquisitions. For example, at PwC we’ve received enquiries from several clients who are considering going public.

So this kind of environment doesn’t automatically mean negative news. There can also be good opportunities for many companies.

Piyanat
So there are opportunities hidden in the situation, if you can see them.

Sinsiri
Exactly. And stock prices are up too.

Piyanat
Yes. So even though there is volatility, there are still opportunities.

What about CFOs? In a more challenging environment like this, who do they need to work with to monitor and manage these issues?

Sinsiri
Today’s CFO needs a very broad skillset.

In addition to accounting and finance expertise, CFOs must be able to collaborate effectively across a wide range of functions. They may need to work with the team responsible for fair value or valuation to understand the assumptions being used and how those assumptions should be reflected in the financial statements.

They also need to work closely with the risk management team, because as we discussed earlier, these situations can create both opportunities and risks that need to be managed carefully.

Another important area is ESG. There are two key points here.

First, the stock exchange has requirements and timelines for listed companies to disclose ESG-related information in their reporting. Many of the data points needed for ESG reporting are closely linked to the accounting team, so accounting often becomes a key support centre for ESG disclosures.

Second, ESG can affect the company’s future strategy—for example, how the organisation wants to operate going forward, whether it wants to change its product mix, or make other strategic adjustments. All of this can affect the numbers in the financial statements as well.

So there is a clear linkage between ESG strategy and financial reporting. That’s why I want to remind CFOs not to overlook the ESG team.

Piyanat
Cross-functional collaboration is becoming more important than ever, and the CFO has to work across a much broader range of teams than before.

Sinsiri
What we’ve discussed so far focuses mainly on coordination across functions within the organisation. Looking beyond the organisation, CFOs also need to manage a wide range of financial and business priorities.

Piyanat
As a final thought, what message would you like to leave with management teams and CFOs? What should they be paying attention to, and how should they respond to the current environment?

Sinsiri
In a volatile environment, I think the key is to analyse carefully, because different factors can affect each business differently.

The same factor may be negative for one company but positive for another. So CFOs need to continuously assess the risks, manage them appropriately, and also keep an eye on the future.

In a way, the CFO should be the CEO’s right hand, helping analyse the organisation and support decision-making so the company can achieve its goals together.

Piyanat
Thank you so much, Sinsiri, for sharing your insights with us today. We now have a clearer understanding of how the economic climate affects corporate finance and reporting, and what organisations should be paying attention to.

We’d love to have you back again to talk about other accounting or financial topics.

Sinsiri
Thank you very much.

Piyanat
For listeners who want to explore more insights on important business issues and trends, please visit PwC Thailand’s website at www.pwc.com/th.

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In our next episode, we’ll be joined by another executive to discuss key business trends and emerging opportunities. Stay tuned.

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