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Honda to close sole UK factory by 2021 to intensify electrification investment

Segment

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

The Market Intelligence Platform


Honda to close sole UK factory by 2021 to intensify electrification investment

Honda Motor Co. Ltd. confirmed Feb. 19 that it will shut down its manufacturing operations in the United Kingdom in 2021, a decision it says is aimed at focusing investment capital on electrified powertrain production at higher volume global sites and that it is unrelated to Brexit.

The company said in a statement it was starting consultations with the plant's 3,500 employees at the 150,000 car-per-year factory, which produces the Civic model and previously manufactured the Jazz / Fit, the Accord sedan and CR-V SUV.

Honda will also cease production in Turkey in 2021, where it builds 38,000 Civic cars each year.

"In light of the unprecedented changes that are affecting our industry, it is vital that we accelerate our electrification strategy and restructure our global operations accordingly. As a result, we have had to take this difficult decision to consult our workforce on how we might prepare our manufacturing network for the future," Katsushi Inoue, president of Honda Motor Europe, said in the statement.

Honda described its plans for the Swindon plant as a "proposal." A spokesman for Honda said the company remained open to examining proposals regarding its future in the U.K. but could not specify under what circumstances its plans could be reversed.

Justin Tomlinson, Member of Parliament for North Swindon, on Twitter described the announcement as "devastating news." The politician said that in conversations with Honda and Business Secretary Greg Clark they were "clear this is based on global trends and not Brexit as all European market production will consolidate in Japan in 2021."

Tomlinson added that Honda did not expect to shed jobs or reduce production up until it ceases operations in 2021 and that the government would set up a task force to provide support for staff.

Automakers are under increasing pressure to invest in the development of electrified powertrains as consumers demand more ecologically friendly products and emissions regulations tighten in developed regions. The European Union will introduce penalties for producers who fail to make cuts to car emissions from 2021.

Honda plans to offer electrified powertrains across two-thirds of its range by 2025, the spokesman said.

The trade agreement between the EU and Japan, which came into force Feb. 1, removed tariffs on Japanese cars entering the bloc, reducing the need for the bases in the U.K. that many Japanese automakers set up in the 1980s and 1990s to circumvent import restrictions, Reuters reported.

Honda's announcement is the latest in a series of blows to car manufacturing in the U.K. Japanese rival Nissan Motor Co. Ltd. said Feb. 4 that it had canceled plans to produce the X-Trail SUV in Sunderland, which would have created new jobs in the sector, while Tata Motors Ltd.-owned Jaguar Land Rover and Ford Motor Co. have announced several thousand job cuts at sites around the world, including in the U.K.

Though Honda insists that Britain's imminent departure from the European Union was not a factor in its decision to shutter its Swindon plant, automakers in the U.K. have expressed concern that just-in-time production would likely become impossible in the event of a disorderly Brexit.


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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