The EU and US’ shift in accounting standards may bring balance sheet losses and increase credit risk, according to James Elder, director of risk services at Standard & Poor’s (S&P) Global Market Intelligence.
Global accounting standards can currently be divided between the US (which has recently introduced ASC 606 and IFRS 15) and the rest of the world, Elder told GTNews at this year’s AFP conference.
This is due to the US planning to implement Current Expected Credit Loss standards (CECL) in the coming years, while the rest of world is implementing similar standards sooner, under IFRS 9.
“Treasurers are going to have to start recognising losses in some of those future business transactions. That will have a very tangible impact on the bottom line of the company,” he said.
This is because, instead of taking reserves when exposures or investments become impaired, they need to be assessed at the initiation of the transaction to reserve for potential future losses, even if the counterparty is healthy.
“Treasurers are going to have to start recognising losses in some of those future business transactions. That will have a very tangible impact on the bottom line of the company”
This could impact the profit and loss of the firm, said Elder.
“Europe is a bit ahead of the game compared to the US but it is coming to all of the regions,” he added.
The revised International Financial Reporting Standard (IFRS 9) has a 2018 start date but CECL is expected to be implemented in the US in 2020 to 2021 for publicly listed and private firms.
Rising interest rates, rising credit risk
Rising US interest rates are also expected to increase the credit risk for some businesses, Elder has warned.
“Interest rates have been held low by the Federal Reserve has had a positive effect on credit risk as financing is cheap,” Elder told GTNews.
“Therefore, as rates rise, financing will be harder to get and prices may start to rise too so we anticipate some change in credit risk.
He added: “If President Trump lowers the corporate tax rate that would probably be a positive for US businesses.”
Increased credit risk may hit some industries harder than others. In recent years businesses operating in the retail and energy space have experienced increased credit risk due to economic and geopolitical pressures and digital disruption.
“We are seeing a lot of enquiries from treasurers that manage their company’s supply chain and credit risk.
“Firms are looking to increase their ability to assess their financial health,” said Elder, who argues S&P’s risk models can help them do this.
“We previously surveyed members of the non-financial corporate community and asked them how many exposures they had from a counter party risk perspective. More than 40% of those companies had over 1000 exposures.
“Technology solutions help them assess their exposures more efficiently. They can then be more proactive in preventing future losses,” he said.