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China concerns weigh ahead of earnings season

Segment

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

The Market Intelligence Platform


China concerns weigh ahead of earnings season

"I think that there are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China," Kevin Hassett, chairman of the White House Council of Economic Advisers, said in an interview with CNN on Jan. 3.

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Source: Associated Press

Hassett's grave proclamation came after Apple Inc. shocked markets by reducing its forecast for first-quarter revenue, citing weaker iPhone sales in China. Although officials from both governments are meeting the week beginning Jan. 7 in an attempt to find a compromise beyond the 90-day détente that began Dec. 1, 2018, it looks like many companies in the consumer space will feel the effects of China's issues, both domestic and international, as earnings season rolls around once more.

Particular attention should be paid to luxury goods companies. The likes of LVMH Moët Hennessy Louis Vuitton SE Kering SA and Hermès International Société en commandite par actions rely heavily on China's middle class and could prove a key barometer of the current state of affairs. These businesses suffered during the final three months of 2018, as the MSCI Europe Textiles, Apparel and Luxury Goods Index's drop of more than 20% showed. Cartier-owner Compagnie Financière Richemont SA is the first to report, on Jan. 11.

Elsewhere, for those businesses without significant direct exposure to China, the combination of slowing growth and a prolonged quarrel with the U.S. is sending jitters through the market. For that reason, all eyes will be on China in the coming weeks.

Chart of the week

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Automotive

Analyst: Tesla's price cut signals demand concerns

A senior research analyst with Cowen said there could be a "demand peak" with Tesla in the United States.

Auto union sues General Motors over breach of contract

The United Auto Workers union sued General Motors over a breach of contract relating to the rights of certain employees who have been laid off.

Fiat Chrysler US sales up 14% YOY in December 2018

The carmaker's Jeep brand sales increased 17% in December 2018 year over year.

Tesla's Model 3 will drive into Chinese market in March

The automaker estimates late March as the delivery time for Tesla consumers in China.

Retail

Big luxury companies could face Chinese headwinds in 2019

The likes of LVMH, Richemont and Kering could come under increasing pressure in 2019 as a result of a slowing China market, a weaker yuan and a U.S.-China trade dispute.

White House economic adviser: Expect weak earnings reports from China trade spat

Kevin Hassett, the chairman of the White House Council of Economic Advisers, told CNN that a "heck of a lot" of American companies may be next to slash their earnings forecasts due to the ongoing trade spat with China.

Amazon should add gas stations to its physical store portfolio, analyst says

Amazon Prime memberships and retention could increase if the e-commerce giant ventures into gas stations, according to D.A. Davidson analysts.

CES 2019 preview: A connected future

Recent years have seen a shift at the world's largest technology conference away from gadgetry and toward interconnectivity.

Reis: US retail vacancy flat overall in Q4'18

A senior economist at the firm interpreted the minimal movement in vacancy rates as a sign of the industry's ability to absorb significant structural change.

Food, beverage and tobacco

China National Tobacco plans to list international unit in Hong Kong

The disclosure came Jan. 2 in a preliminary filing to the Hong Kong Stock Exchange that offered little information on the planned initial public offering of China Tobacco International (HK) Co. Ltd.

Nestlé welcomes Supreme Court ruling in Maggi case against Indian government

India's National Consumer Disputes Redressal Commission in 2015 sought approximately 6.40 billion rupees in damages on behalf of Indian consumers, alleging that Nestlé India publicly sold Maggi noodles "without product approval."

FDA chief hints dialogue with e-cigarette CEOs over teenage vaping

In a series of tweets, U.S. Food and Drug Administration Commissioner Scott Gottlieb suggested that some companies appear to be backing away from the commitments they have made to the FDA in relation to the prevention of underage use of e-cigarettes.

GM's self-driving unit Cruise ties up with DoorDash to trial autonomous delivery

The companies said they expect to develop safety measures and operational improvements based on the results of the pilot.

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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