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Consumer companies fear Brexit fallout


IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform

Consumer companies fear Brexit fallout

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Source: Associated Press

Say it quietly, but the political story that has dominated Europe for the past 2.5 years may be nearing its endgame. Britain is scheduled to leave the European Union on March 29, 2019. Negotiations have moved at a glacial pace, but as the deadline nears and reports of a deal on financial services being close to an agreement gather pace, there are signs that the U.K. may not be destined for as disorderly a Brexit as many have feared.

That would be welcome news for consumer-facing companies operating in the U.K. As our analysis below shows, Nestlé SA, Unilever NV and Diageo PLC have all warned of the very specific effects a hard Brexit would have on their ability to do business, from research and development to packaging and distribution, and all points in between. Smaller domestic operators would be even harder hit, with Mike Coupe, CEO of supermarket chain J Sainsbury PLC, saying it is "inconceivable" that certain products would not be in short supply.

Brexit is by no means a purely European issue. The situation will also be monitored closely by the Trump administration, which is preparing for bilateral trade talks with Japan, the EU and the U.K. Given the positive nature of trade relations between the U.S. and the U.K., that deal could be the "quickest and easiest" to clinch, one analyst told S&P Global Market Intelligence.

Of course, the fallout from Brexit will continue long past March 29. But for politicians and companies alike, some semblance of a resolution cannot come soon enough.

Chart of the week

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Fiat Chrysler CEO committed to electric vehicle investment

The automaker said it will move forward with its electric-vehicle programs, despite expected increases in industrial costs.

Cars, agriculture likely main focus in bilateral talks with Japan, UK, EU

Potential free trade agreements could boost American exports of automobiles and agriculture products, some experts say.

S&P downgrades Hyundai, Kia on weakened profitability

The rating agency said Hyundai and Kia face intense competition in the U.S. and China, and slowing growth in car demand.


Rising dollar dings consumer products companies

U.S.-based consumer goods producers' profits are under pressure as the U.S. dollar rises, executives indicated in the most recent round of quarterly earnings reports.

Alibaba lowers FY'19 revenue target as Chinese economy slows

The Chinese e-commerce giant said Nov. 2 that it now expects revenue growth of between 50% and 53%, a slower clip than the 60% it forecast in May.

Kroger: 'High fee structure' not integral to grocery pickup, delivery options

The U.S. supermarket operator is open to changing what it charges for order fulfilment, Group Vice President and Chief Digital Officer Yael Cosset said Oct. 30.

Estée Lauder sees China sales growth slowing as tariffs rise

Expansion in a key market for the cosmetics maker could cool in the second half of its 2019 fiscal year as the U.S. raises duties on imported raw materials, such as makeup brushes, executives said Oct. 31.

Kroger to offer Toys R Us products in supermarkets

The grocer said Nov. 2 that it will carry toys sold under brands managed by Geoffrey's Toy Box going into the holiday season at about 600 of its 2,800 stores.

Food, Beverage & Tobacco

Suppliers of consumer goods, food, drink brace for hard Brexit

Many of Europe's largest consumer companies, including Nestlé, Unilever and Diageo, have warned that a hard Brexit scenario would cause major supply chain disruptions.

China helps drive Starbucks' Q4, FY'18 growth as coffee chain eyes expansion

Starbucks wants to open more stores and boost delivery in China, which is driving revenue growth for the global coffee chain.

Kraft Heinz CEO: More divestitures could follow exit of India brands

"I think there are other things to be considered within the portfolio in general," Hees said Nov. 1, days after the company agreed to sell a range of brands worth $625.1 million.

Kellogg execs defend investments amid operating profit, stock drops

The cereal and snack maker is putting more money behind its businesses to drive long-term growth at the expense of short-term operating profit and a cut to its earnings guidance, executives said Oct. 31.

Consumer Edge is a weekly collection of critical developments across the automotive; retail; and food, beverage, and tobacco industries that draws on exclusive analysis and value-added content from the Consumer News team at S&P Global Market Intelligence.

Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
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