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Grant Thornton’s culture is one of our most valuable assets and has steered us in the right direction for more than 100 years.
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Beyond global scale, we embrace what makes each market unique, local understanding on a global scale.
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In a world that wants more options for high quality services, we differentiate in the market to grow sustainably in today’s rapidly changing environment.
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Grant Thornton International Ltd acts as the coordinating entity for member firms in the network with a focus on areas such as strategy, risk, quality monitoring and brand.
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The laws surrounding transfer pricing are becoming ever more complex, as tax affairs of multinational companies are facing scrutiny from media, regulators and the public
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Africa tax desk
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Banking Holding banking to account: the real diversity and inclusion pictureWe explore how the banking sector can continue to attract, retain and nurture women to build a more diverse and inclusive future.
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Sustainability From voluntary to mandatory ESG: How banks can future-proof their operationsAs we move from voluntary ESG initiatives to mandatory legislation, we explore what the banking sector needs to prioritise.
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IFRS IFRS 9 - Audit of Expected Credit LossesGPPC releases The Auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9
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growthiQ Steering your company to long-term successHistory has something important to tell us about the difficulties of steering a business to long-term success – through seismic shifts in technology, consumer demands and product development. With that in mind it’s unsurprising that over half the world’s largest companies in the early 1900s had shut their doors by the late 1990s. Some, however, have endured.
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International Financial Reporting Standards Implementation of IFRS 17 ‘Insurance Contracts’The auditor’s response to the risks of material misstatement arising from estimates made in applying IFRS 17 ‘Insurance Contracts’
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IFRS Get ready for IFRS 17After twenty years of development the IASB has published IFRS 17 ‘Insurance Contracts’, find out more.
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - Sector analysis Clear patterns of damage from COVID-19 across the industriesThe index results for 12 key sectors of the mid-market reveal just how much or little the various parts of the economy were impacted by COVID-19.
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Not for profit Mission: possible – putting impact at the heart of charityGlobal charitable continues to decline and charity leaders are increasingly looking at their own unique impact journey.
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Access to finance Raise finance to invest in changePrepare your business to raise finance to invest in change.
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Private equity firms Private equity in the mid-market: reshaping strategies for 2021When the global COVID-19 pandemic stormed across the globe in early 2020, the private equity sector was hit hard but deals are coming back to the market.
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Mid-market businesses Getting ready for private equity investmentOur specialists explore how private equity firms are now working with their portfolios and how the mid-market can benefit from investment.
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Mid-market businesses Myth-busting private equityNervous about partnering with Private Equity? We explore some of the common myths we come across when speaking to mid-market businesses about PE investment.
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Public sector Helping build the government of tomorrow, todayLearn about the Grant Thornton US public sector team.
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - Sector analysis Clear patterns of damage from COVID-19 across the industriesThe index results for 12 key sectors of the mid-market reveal just how much or little the various parts of the economy were impacted by COVID-19.
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Industries European Real Estate PodcastJessica Patel, Tax Partner at Grant Thornton UK speaks with tax partners and directors across the network to share their insights on the real estate market and some of the challenges.
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Industries European Real Estate PodcastJessica Patel, Tax Partner at Grant Thornton UK speaks with tax partners and directors across the network to share their insights on the real estate market and some of the challenges.
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Retail How retail is positioning for successCOVID-19 provided some hard lessons for the retail industry. It is time to turn those into sustainable and well executed growth strategies in 2021.
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Telecoms Can tech and telecom leverage economic headwindsAs most businesses brace for an economic downturn, tech and telecom could see new prospects. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks.
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Technology Mid-market tech companies lead the way on diversity and inclusionWe explore how the mid-market tech sector can continue to build and nurture a culture that’s increasingly more diverse and inclusive for women.
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Tax Resetting global tax rules after the pandemicBusinesses are seeing rising challenges, and finance heads are dealing with a range of new measures. To say the next 12 months are critical for businesses is an understatement.
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TECHNOLOGY International tax reform: the potential impact on the technology industryIn this article, we’ve summarised key elements of the global tax reform proposals, their potential impact on technology industry and advice from our digital tax specialists on what technology companies can do to prepare.
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Telecoms Can tech and telecom leverage economic headwindsAs most businesses brace for an economic downturn, tech and telecom could see new prospects. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks.
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TMT TMT industry: Fully charged or on standby?Our research revealed five key trends that resonated with Technology, Media and Telecoms (TMT) industry leaders around the world. We asked a panel of our experts from UK, US, India Ireland and Germany, to give us their reaction to the findings.
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Cybersecurity One size fits nothingTechnology companies must adopt a new approach to digital risk: those that successfully develop a reputation for digital trust by demonstrating an unwavering commitment to cyber security and data privacy will be able to carve out a competitive advantage.
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Technology, media & telecommunications Why it’s time for a 5G reality checkFigures suggest the mobile sector is maturing. While data usage continues to soar, mobile revenues are expected to flatten out over the next few years.
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International business Mid-market businesses lifted by rising tide of optimismOptimism among global mid-market business leaders rose to 67% in the first half of this year and they are markedly more optimistic about their prospects with global optimism having increased by 8%.
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Hotels COVID-19: Checking in with the hotel industry one year onCOVID-19 provided some hard lessons for the hotel sector. It is time to turn those into sustainable and well executed growth strategies.
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Under IFRS, if an entity is applying hedge accounting as part of its risk management strategy, it will follow the hedging requirements in IFRS 9 ‘Financial Instruments’. However, it could still be applying the requirements in IAS 39 ‘Financial Instruments: Recognition and Measurement’ in certain circumstances. In both cases, a key criterion relating to cash flow hedges over forecast transactions relates to the requirement for the hedged cash flows to be highly probable. This is set out in IFRS 9.6.3.3.
During the COVID-19 pandemic, an entity therefore may need to consider:
- If the hedged cash flows still meet the highly probable assessment (if not, the hedging relationship will have to be discontinued, in its entirety or only in part in accordance with IFRS 9.6.5.6).
- If the cash flow hedge reserve includes amounts that should be moved to profit or loss upon discontinuation of the hedge.
- If there is any hedge ineffectiveness to recognise in the profit or loss for hedges that continue to meet the qualifying criteria to apply hedge accounting.
Download the article below or read on for our insights.
Do hedged cash flows still meet the highly probable assessment?
The requirement to meet the highly probable assessment is crucial. The impact of COVID-19 needs to be taken into consideration in the highly probable assessment, based on the facts and circumstances that exist at the end of the reporting period.
For instance, entities frequently enter into cash flow hedges of forecast transactions, such as the purchase and sale of raw materials and inventories. A forecast transaction can be designated as a hedged item only if it is highly probable to occur. The highly probable assessment is therefore likely to be significantly impacted. The impact of some or all of the hedged transactions ceasing to be highly probable could vary depending on the facts and circumstances, varying from hedge accounting failure, partial hedge discontinuance or significant ineffectiveness.
The impact of this is likely to be significant for any entities which hedge forecast transactions where the volumes are impacted by COVID-19. It may be that derivatives were taken out at earlier times where the hedged levels were considered highly probable at the time of hedge inception, but due to COVID 19 in the intervening period the highly probable cash flows will now likely to be significantly reduced.
This can also be relevant to cash flow hedges over interest rate risk. While the hedged item in many cases will relate to interest cash flows on debt which is from committed facilities, projected covenant failure due to COVID 19 could impact the hedge accounting assessment. Similarly, if the hedged cash flows included a forecast issuance of debt, COVID 19 could impact the highly probable assessment of this.
What is meant by highly probable for IFRS 9?
The term 'highly probable' is not defined in IFRS 9 but is interpreted to have a much greater likelihood of occurring than 'more likely than not'. The meaning of the term has not changed between IAS 39 and IFRS 9 and IG F3.7 accompanying IAS 39 provided guidance on the meaning.
Assessing whether a forecast transaction is 'highly probable' and/or 'expected to occur' requires judgement based on individual facts and circumstances. Although IFRS 9 does not specify a quantitative threshold to define these terms, 'expected to occur' might be interpreted as more likely than not (ie a probability of over 50%), and 'highly probable' as being much closer to 100%.
The interpretation guidance mentioned above contained some helpful guidance to interpret 'highly probable' with respect to hedge accounting. That guidance indicated an assessment of the likelihood that a forecast transaction will take place is not based solely on management's intention, it should be supported by observable facts and the attendant circumstances, such as:
- the frequency of similar past transactions
- the financial and operational ability of the entity to carry out the transaction
- whether substantial commitments of resources have been made to a particular activity
- the extent of loss of disruption of operations that could result if the transaction does not occur
- the likelihood that transactions with substantially different characteristics might be used to achieve the same business purpose, and
- the entity's business plan.
Overall COVID-19 will mean that in many industries, there will be a lower confidence level on sales or purchases. This will depend on facts and circumstances, including the nature of the products and services and the extent to which demand and the ability to supply has been impacted by the pandemic and therefore the level of uncertainty on a forward-looking basis with reference to the hedged item.
What should you do when a hedging relationship is discontinued?
If a hedging relationship is discontinued because a forecast transaction is no longer highly probable, the entity needs to assess whether the transaction is still expected to occur. Just because the hedged transaction is no longer highly probable does not automatically mean that all related other comprehensive income reserves should be transferred to the profit or loss immediately upon the discontinuance or partial discontinuance of the hedging relationship.
Potential sources of ineffectiveness in cash flow hedges
COVID-19 also introduces potential sources of hedge ineffectiveness where interest payments on loans are subject to a deferral of forgiveness. In addition, many loans contain interest floors (eg interest rate is LIBOR +1% but loan contract says LIBOR is floored at 0%). Where interest rates fall, this increases the likelihood of the interest floor impacting the future cash flows as there may be no corresponding floor in the hedging instrument. This causes a source of hedge ineffectiveness because when some repayments are postponed to a later date for the hedged loan, there could have several periods where the interest cash flows on the swap have nothing to match on the hedged instrument’s side, which could result in ineffectiveness.
In addition, the increased credit risk as a result of COVID-19 could affect the hedge effectiveness. The credit risk of the counterparty could affect the hedge effectiveness testing and the measurement of hedge effectiveness, and this is true both for hedging instruments and hedged items. For instance, if the credit risk of the counterparty to an uncollateralised derivative has deteriorated as a result of COVID-19 (eg it being severely downgraded by external rating agencies such as Moody’s or S&P), the hedging relationship will most likely have to be discontinued.
In these situations the qualifying criterion for hedge accounting in IFRS 9 which is 'the effect of credit risk does not dominate the value changes that result from that economic relationship' will probably no longer be met. Another example would be where the hedged asset becomes credit impaired as a result of the pandemic: here the hedging relationship would cease if the hedge no longer met the requirements of hedge effectiveness.
Another source of ineffectiveness, in the case of hedging foreign exchange risk of expected foreign exchange sales or purchases, is when the date of the future transaction is postponed (while the cash flow date on the hedging derivative remains unchanged). The calculation of the resulting ineffectiveness would depend on how exactly the hedged transaction is documented. Although forecast transactions related to inventory do not pose credit risk, the credit risk of the possible counterparty to the anticipated transaction can indirectly affect the assessment of whether the transaction is highly probable.
Potential non-recoverability of OCI reserves
If an entity expects that all or a portion of the other comprehensive income (OCI) reserve (that is a loss) will not be recovered in the future, it should straightaway reclassify the amount that is not expected to be recovered into profit or loss as a reclassification adjustment. This is the case even for hedges that remain in place.
Situations where this potentially could happen during the COVID pandemic are as follows:
- a hedge of future purchases of goods whereas the expected reselling price of these goods would not permit to recover the current loss in OCI
- a hedge of interest rate risk of floating rate financial asset that has been impaired.
What disclosure requirements?
An entity is required to apply the disclosure requirements in accordance with IFRS 7 ‘Financial Instruments Disclosure’ for those risk exposures that an entity hedges and for which it elects to apply hedge accounting. In our view, hedge accounting disclosures should provide information about:
- an entity’s risk management strategy and how it is applied to manage risk
- how the entity’s hedging activities may affect the amount, timing and uncertainty of its future cash flows
- the effect that hedge accounting has had on the entity’s Statement of Financial Position, Statement of Other Comprehensive Income and Statement of Changes in Equity, including amounts relating to hedge accounting that have been recognised in profit or loss, and
- the impact of COVID-19 on hedge ineffectiveness.
- the impact of COVID-19 on hedge discontinuation and the resulting transfers of OCI reserves to the profit or loss (the nature of forecast cash flows that are no longer highly probable, amounts relating to discontinued derivatives and other comprehensive income transfers).
How we can help
Preparers of financial statements will need to be agile and responsive as the situation unfolds. Having access to experts, insights and accurate information as quickly as possible is critical – but your resources may be stretched at this time. We can support you as you navigate through accounting for the impacts of COVID-19 on your business.
Now more than ever the need for businesses, their auditors and any other accounting advisors to work closely together is essential. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact your local member firm.