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Succession plan in motion, Unilever hopes for more of the same

Segment

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

The Market Intelligence Platform


Succession plan in motion, Unilever hopes for more of the same

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Source: Wikimedia Commons

Since being forced into an embarrassing climb-down on the proposition to move its headquarters from London to Amsterdam in October, Unilever PLC has stayed out of the spotlight. That changed Nov. 29 when the consumer goods giant announced that CEO Paul Polman would be retiring after 10 years in charge.

Polman's departure was well-signaled, and investor reaction to the news was muted, with the share price barely budging. Furthermore, Alan Jope, Polman's successor and current president of Unilever's beauty and care division, has all the markings of a continuity candidate.

As seamless as the transition may be, Jope and Unilever NV still have issues to address, two of which stand out immediately. Days after the succession announcement, the company confirmed its €3.3 billion acquisition of GlaxoSmithKline PLC health food drinks brands. It is one of the larger acquisitions in the company's recent history, and while Unilever says the transaction will be immediately EPS accretive, the purchase price appears full, not surprising given that Nestlé SA and Coca-Cola Co. were also reported to be in the running. At a time of growing concerns of overheating in the M&A market, the deal will surely attract more scrutiny than many of the company's recent smaller acquisitions.

In addition, the headquarters relocation that caused such unhappiness in Unilever's shareholder base remains the elephant in the room. The company said at the time that it continued to believe in its plan and would consider further options. Such was the backlash at the time that Jope must tread very carefully if he is to revisit the matter.

Chart of the week

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Automotive

Ghosn departure may set stage for Renault-Nissan power struggle

Tensions over the lop-sided distribution of power between partners Nissan and Renault have come to the fore since the arrest of Carlos Ghosn, but all sides will lose if a struggle for influence jeopardizes their two-decade-old alliance, analysts say.

Experts: Changing auto industry could shift populations, auto workforce

Auto industry design engineers are focusing on two types of cars now: personal and autonomous.

Report finds 9.6 million EV chargers will be needed in US by 2030

Electric utility companies are well-positioned to help with the massive expansion of the nation's electric vehicle charging infrastructure needed to accommodate exponential growth in the EV market, according to a new report.

General Motors to cut car production, 15% of salaried employees in North America

The automaker also announced it is closing three assembly plants in 2019.

Honda to test connected, autonomous tech in Ohio in 2019

The testing will be done in a 35-mile "mobility" corridor, an executive said.

Retail

Unilever signals continuity as internal candidate named as new CEO

Unilever said CEO Paul Polman would step down at the end of 2018 and would be succeeded by Alan Jope, head of the beauty and personal care division.

Black Friday sales up YOY; driven by online, smartphone purchases

Consumers spent a record $6.22 billion online on Black Friday, according to an initial report from Adobe Digital Insights.

Cyber Monday sales set record, jump 19.3% YOY

Holiday shopping is expected to continue on the Black Friday and Cyber Monday momentum through Christmas.

Lawmakers continue to press Amazon on facial recognition software

Amazon has until Dec. 13 to respond to queries from members of Congress regarding its facial recognition technology.

Food, Beverage & Tobacco

Unilever to buy GSK's health food drinks brands for €3.3B

Unilever said the portfolio, which includes Horlicks, and the category had grown at a double-digit rate, but the category remains underpenetrated, allowing scope for further development.

Lettuce labeling to ease E. coli fears, but experts point to additional steps

Enhanced traceability and renewed efforts to avoid contamination on farms should also be part of plans to avoid and contain future outbreaks, experts said.

Analyst: Growth at grocers' private labels losing momentum

While still gaining market share against Kraft Heinz, Conagra and similar companies, own brands may be losing steam as grocers raise prices.

Potential Altria-Juul deal would benefit both companies, analysts say

A deal could help both companies deal with regulatory moves on menthol and e-cigarettes but also raises questions about Altria's ambitions in heated tobacco, analysts said.

Analysts: Papa John's should focus on franchisees, deals after buyout bid fades

The struggling pizza chain needs to reassure franchisees hit by declining sales that management can turn the business around, analysts said.

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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