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Queens kicks Amazon to the curb

Segment

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

The Market Intelligence Platform


Queens kicks Amazon to the curb

In November, Amazon.com Inc.'s lengthy and much-publicized search for a second headquarters came to a conclusion. Or so it seemed until last week, when the e-commerce giant announced it would no longer set up a major hub in Long Island City, N.Y., in the face of political backlash.

SNL Image

Source: Associated Press

Despite the promise of massive job creation and major stimulus for adjacent industries, consternation from local lawmakers and citizens' groups has heightened since the initial announcement.

Critics highlighted the lack of transparency in the process and argued that a city like New York should not be handing out more than $1.5 billion of incentives to attract major companies, particularly one whose tax bill is already under considerable scrutiny.

When compared to other recent job creation programs by Apple and Google, which did not involve such sizeable incentives, Amazon's invitation for municipals to enter into a de facto tax-credit bidding war looks, from a public relations perspective at least, like a misjudgment.

The HQ2 affair is another unwelcome distraction for Amazon, which finds itself the subject of increasing political attention. This year alone has seen founder Jeff Bezos' public feud with the National Enquirer, which President Donald Trump has gleefully weighed in on, and a think-tank report that found the company had an effective federal tax rate of negative 1% in 2018.

That level of scrutiny is a natural consequence of being a nearly $1 trillion business run by the world's richest man. Amazon's stock price movements over recent months suggest shareholders are not overly concerned, but they would no doubt prefer that the company generates fewer headlines in the months to come.

Chart of the week: Amazon's original HQ2 plans

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Automotive

US passenger car sales suffer historic drop in 2018

Chart Watch: Passenger car sales in the U.S. dropped 12.8% year over year in 2018, while sales of trucks, minivans and SUVs continued to grow.

US-Japan trade negotiations likely to focus on agriculture, auto

The U.S. Trade Representative's Office has eyed boosting agriculture and auto exports to Japan in a potential free trade agreement.

Subprime auto company says 2016 election contributed to bankruptcy filing

A company focused on selling and financing used vehicles to Hispanic customers listed the outcome of the 2016 presidential election among the various internal and external challenges it encountered prior to seeking Chapter 11 bankruptcy protection.

Retail

Amazon cancels plans for New York headquarters

The e-commerce giant said it will not reopen its HQ2 search and will proceed with its plans to open operations in Northern Virginia and Nashville, Tenn.

Amazon flight puts Queens tech dream on hold

Long Island City and New York City on the whole will continue to flourish despite the online retail giant abandoning a planned office hub in the Queens borough, observers said.

Consumer, industrial companies plan for tariff increase in FY'19 guidance

As talks between the U.S. and China continue, companies focused on consumer and capital goods are bracing for some duties to rise to 25% from the current 10%, an analysis of executives' comments during earnings season shows.

February retail market: Bankruptcy pace weakens; December '18 sales decline

Three S&P Global Market Intelligence-covered U.S. retail companies filed for bankruptcy in the late January to early February period.

Consumer imports from China slow after months of stockpiling ahead of tariffs

Seaborne imports from China fell 1.5% in January year over year as companies pulled back on building up inventories to beat potential tariffs, according to a report by Panjiva Inc.

Food, Beverage & Tobacco

Coca-Cola targeting earnings growth despite possible negative FY'19 EPS turn

The soda-maker's share price plunged 7.5% in daytime trading Feb. 14 after it issued guidance for 2019 that includes a possible drop in full-year comparable EPS.

Third Point continues buying Campbell shares in Q4, exits Alibaba holding

The hedge fund reached an agreement with the food company in November 2018 after leading an activist campaign.

PepsiCo aims to cut costs, reinvest savings to boost growth

The snack- and soda-maker is targeting $1 billion in savings in 2019 and plans to reinvest about half of the money back into the business during the year to drive long-term growth, executives said.

Wholesale grocery prices slow their rise in January

But the prices that grocers paid to stock their shelves still rose faster than the prices they charged consumers, according to an analysis of federal data.

FDA weighing further steps to combat rising underage e-cigarette use

E-cigarettes drove an increase in overall tobacco use by high school and middle school students in 2018, the Centers for Disease Control and Prevention reported Feb. 11.

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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