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Cigarette-makers see woe in Canada, but hope in US

Segment

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

The Market Intelligence Platform


Cigarette-makers see woe in Canada, but hope in US

To say the past few weeks have been turbulent for manufacturers of tobacco products would be an understatement.

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Source: Thinkstock

In Canada, a March 1 ruling upheld the judgment in two 1998 class-action lawsuits that had been appealed by the Canadian subsidiaries of Philip Morris International Inc., British American Tobacco PLC and Japan Tobacco Inc. With damages totaling about C$15.6 billion, the verdict could have a massive impact on tobacco giants' local operations, including possible bankruptcies, analysts said.

Sure enough, Japan Tobacco's JTI-Macdonald Corp. has since sought protection from creditors, while Philip Morris cut its EPS forecast for the 2019 fiscal year as a result of litigation charges in connection with the lawsuit.

Although the three companies plan to appeal the judgment again, the case is a reminder of the complex legal issues that remain from tobacco companies' legacy activities. Their efforts to move into the future with new, potentially less harmful products have also been met with challenges, the most notable being U.S. Food and Drug Administration Commissioner Scott Gottlieb.

Gottlieb has repeatedly criticized tobacco companies for a range of practices, including marketing products to minors, and signaled much stricter legislation. However, the industry was given a surprise boost on March 5 when Gottlieb announced his resignation, leading to a surge in tobacco stocks.

Gottlieb's April departure may not lead to the complete policy reversal some companies might wish for, but analysts believe it could result in adjustments and delays to the current agenda. As CFRA senior equity research analyst Garrett Nelson told S&P Global Market Intelligence: "It's hard to imagine the new FDA chief would be more aggressive than Gottlieb was."

Chart of the week: Consumer Discretionary leads S&P 500 performance by industry

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Automotive

Renault reaps rewards from early move into EVs, sets sights on Chinese market

The French automaker says it will maintain its unique leasing of batteries to electric car buyers, which it says remains popular, while it sets its sights on a bite of the Chinese market.

Peugeot chief slams disjointed EU policy on car emissions, electrification

EU rules calling for a 35% cut to car CO2 emissions by 2030 will leave its manufacturers reliant on an Asian battery production monopoly, Peugeot's CEO said.

White House budget proposal aims to end electric-vehicle tax credit

President Donald Trump's proposed budget for fiscal 2020 says eliminating the credit would save the country about $2.5 billion over the next decade.

Retail

Consumer discretionary's 700% return leads S&P 500's record 10-year bull run

Chart Watch: A dominant performance from Amazon.com helped the S&P 500 subindex return 702% since March 6, 2009, compared with 403% for the broader gauge. Real estate was second with 607%, while the worst performer was energy, with a 103% gain.

Kohl's CEO: Headwinds from shipping costs could increase as e-commerce grows

The retailer expects e-commerce shipping costs to account for 20 basis points to 30 basis points of headwinds on its gross margin in fiscal 2019.

Big items, small selection ideal for scan-and-go tech, Sam's Club exec says

The retailer's membership wholesale arm is expanding the service nearly one year after the company killed it at traditional Walmart stores.

Gap CEO: Company structure suffers from 'lack of focus' in investments

The process of separating Old Navy from the other Gap brands will take 12 months to 18 months, President, CEO and director Arthur Peck said at an industry conference March 4.

Target eyes smaller store format, invests in delivery, pickup in 2019

The initiatives should help drive continued comparable sales growth for Target in 2019, executives said March 5.

Food, Beverage & Tobacco

Kroger execs: Grocer on track to hit 2020 goals despite Q4'18 earnings miss

The grocer's executive team touted expected future payoffs from investments in Kroger's supply chain, remodeling stores and growing its online businesses.

Analysts: Tobacco restrictions could be delayed after FDA chief's resignation

The departure of U.S. Food and Drug Administration Commissioner Scott Gottlieb puts the timing of some of the agency's key tobacco control initiatives in doubt, analysts said.

Analysts: Tobacco giants' Canadian units could face bankruptcy after court case

But resolutions to the cases are likely years away as the companies owned by global tobacco giants promised to press their cases to Canada's highest court, analysts said.

Albertsons aims to move fast, 'fail cheaply' online, VP says

The executive overseeing the grocer's digital efforts spoke to S&P Global Market Intelligence at Shoptalk 2019 in Las Vegas.

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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