Companies reporting under UK GAAP are facing new regulatory requirements under FRS 102. Particularly, accounting for financial instruments is changing significantly. Starting 2016, treasuries will be audited under the standard.
1. What´s new under FRS 102?
Most basic financial instruments continue to be measured at amortized cost. More complex financial derivatives such as options, forwards, futures, interest rate swaps or loans with complex provisions are measured at fair value through profit and loss.
2. How do I calculate fair values?
Fair value is the theoretical assumption of where a futures contract should be priced, given parameters such as the current index level, index dividends, days to expiration and interest rates. There are typically three ways to obtain fair values:
- Ask your bank: You can obtain valuation results from your banking counterparts. However, this often raises concerns over auditability as banks normally would not provide the parameters and assumptions they made on their valuation model and the price verification would not be independent.
- Do-it-yourself: You will need to develop pricing model, source market data and find reliable tools for fair value calculation, especially for complex derivatives. Given the short time left until your first FRS 102 audit, it might already be a time-sensitive challenge to start from scratch with derivative reporting.
- Outsource it: Outsourcing fair value calculations and derivative reporting might be an easy way to get what you need fast, while sorting out the best approach for your company.
3. Where can I source data for fair value calculation?
In general, there are two ways to get market data:
- Sourcing data directly is typically an expensive option.
- Integrated market data feeds from cloud treasury systems such as Reval. Reval expert teams are working in the background to provide market data for the global client community. Constantly, new curves are added to improve the service and satisfy client requests.
4. How long will it take to set up the valuation program?
This is subject to the size and complexity of your portfolio, the pricing model, the availability of market data and the tools you are using.
Excel is a popular tool to handle valuation for vanilla instruments, such as FX spots or forwards. However, using spreadsheets for fair value computation for more complex derivatives or bigger portfolios is not recommended. Manual-data gathering and manipulation will not only be time-consuming and burdensome, but also will heighten operational and control risk significantly.
Additionally, production of reports and disclosure notes for FRS 102 will require extra effort.
5. What tools and services can help you comply with FRS 102 Section 11 & 12?
Let´s review the technology options and services available for financial instruments accounting under FRS 102:
- Spreadsheets might help with basic fair value calculations, but are not sophisticated enough to efficiently manage derivative portfolios and compliance reporting.
- ERP systems will handle most of the FRS 102 requirements, but commonly won´t include sufficient capabilities for fair value pricing and hedge accounting.
- Treasury management systems streamline derivative valuation and reporting end-to-end, while increasing visibility into cash, liquidity and risk at an enterprise level.
- Outsourcing derivative reporting could be a good alternative if you have a relatively small portfolio or do not have the budget or time to implement a new treasury system with derivative risk management capabilities.
The switch from UK GAAP to FRS 102 can be simple. Start preparing now and bring the right partners onboard.
For more information on fair value measurement under FRS 102, take a look at our infographic "3 Things to Know about Fair Value Measurement under FRS 102".
For more information on how Reval CORE can get your team up and running quickly on treasury software, click here.
For more information on Reval’s oursourcing services and how our support team works with your treasury organization, click here.