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Brewers take action to quench their thirst for water

Segment

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

The Market Intelligence Platform


Brewers take action to quench their thirst for water

Big businesses are often criticized for trumpeting their environmental, social and governance credentials while providing little substance to back up those claims. It is interesting, then, to see how much effort companies are willing to invest when there is a clear and tangible threat to their operations. Case in point is the effort by major brewers to secure their most essential commodity: water.

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Source: Unsplash

It is startling how much water is needed to brew beer. In 2015, Denmark's Carlsberg A/S used 3.4 liters of water for every 1 liter of lager produced. As much of the water is used to grow barley, the issue affects beer brewers much more deeply than other beverage companies. This comes as global water demand is expected to boom in the coming years.

But as our report this week shows, brewers are alert to the risk and mobilizing. Carlsberg has cut that 3.4-liter figure to 2.5 liters and plans to reduce it to 1.7 liters by 2030. Anheuser-Busch InBev SA sends purified wastewater from its brewery in Bolivia to local farmers for free, a move it says facilitates water security for everyone in the region. Heineken NV has repaired dams, hired dozens of agronomists and grown barley among olive groves. "Governments may be surprised we take this responsibility. It's new for us, too," said Willem de Jonge, global director of sustainable development at Heineken.

Though their motives are clear, it is encouraging to see brewers looking beyond their factory walls and taking on projects that can benefit whole communities. They will need to continue to ramp up their efforts to tackle this very present threat.

Chart of the week

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Automotive

Hydrogen, power lines could give batteries boost on road to low emissions trucks

Lord Adair Turner, co-chair of the Energy Transition Commission, says battery-electric technology is viable in buses and medium-size trucks, but a more creative approach is needed to cut emissions from the heaviest trucks on the road.

Ferrari 'confident' going into 2019 despite global headwinds

The Italian automaker said its research and development costs for 2019 should be similar to 2018 but with more spending on new vehicles.

UK auto industry fears Brexit hammer blow as domestic sales, exports fall

The Society of Motor Manufacturers and Traders says the industry is already suffering from the impact of Brexit and has called on the U.K. government to avoid a disorderly departure from the EU, which would make the situation even worse.

Retail

In-store pickup gains traction at retailers

At some companies, online sales are split almost evenly between orders picked up in stores and those mailed directly to customers.

Alibaba bullish on Chinese consumer demand, expects profit growth to continue

"Chinese consumption growth is still strong, driven by a growing base of increasingly affluent young consumers," Alibaba CEO Daniel Zhang said on a conference call following the publication of the company's third-quarter results.

EBay to pay 1st-ever quarterly dividend as execs outline growth plans

The e-commerce company is betting on expanded advertising and payments to help drive revenue in 2019, 2020 and beyond, executives said Jan. 29.

Amazon CFO: India e-commerce law doesn't help business

CFO Brian Olsavsky said Jan. 31 that the Seattle-based company has included the effects of the new law in its fiscal first-quarter guidance.

Food, Beverage & Tobacco

Thirsty beer companies fight to shore up water supplies

Faced with increasing scarcity across the globe, beer-makers are taking aggressive steps to shore up water supplies for their breweries.

McDonald's plans initiatives to reverse declining US restaurant traffic

Executives for the fast-food giant also issued new fiscal guidance for 2019 and beyond.

Farm groups, experts urge tariff reduction, independence in US-UK trade talks

Several groups told a U.S. government panel Jan. 29 that a free trade deal with the U.K. should include zero tariffs and a regulatory and tariff schedule less onerous than that of the EU.

Dairy group: No deal with Japan could cost US billions

Should no trade agreement be reached with Japan, U.S. dairy producers could face vast losses in sales, the U.S. Dairy Export Council warned in a new report.

Aiming to trim losses, Blue Apron shifts production to New Jersey from Texas

The meal-kit company is predicting another drop in sales for fiscal 2019 so it is revisiting its production network and rolling out new products.

Altria looks to Juul, cannabis investment as cigarette volumes continue declines

The U.S. tobacco giant is also planning to lay off 900 employees as part of a plan to cut an expected $575 million in costs to offset expense from the investments, executives said Jan. 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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