UK finance chiefs and treasury teams are navigating impending regulatory compliance issues as well as the uncertainty of complex Brexit scenarios. Understanding the implications of key regulations will be helpful to build a compliance strategy. While some compliance burdens are directly related to banks, the knock-on effect is that corporates are not able to readily access cash. Additionally, organizations who are reliant on spreadsheets to manage their compliance obligations are too lean to deliver critical decision support to help reach growth objectives.
IFRS 16 changes how companies that report under international financial reporting standards recognise, measure, present and disclose leases for annual reporting periods beginning on or after 1 January 2019. This presents a significant challenge for the finance departments of companies that use operating leases as they will need to carefully scrutinise leasing agreements in order to correctly classify the company’s leases. IFRS 16 will also involve companies having to make new estimates depending on the nature and lease term, which may affect forecasts.
Related reading: Why is lease accounting so difficult?
The new standard also represents an opportunity for corporates to increase their control over their leasing obligations. Some companies are using the introduction of IFRS 16 as a motivation to assess their approach to financial reporting. Using a technology solution with intuitive workflows to support IFRS 16 lease accounting standards, including lease management, calculations and general ledger integration, will make this process easier.
The implications of MiFID II for corporate treasury are not immediately apparent given its focus on enhancing investor protection, reducing systemic risks and increasing market efficiency. The connection lies in the MiFID II requirement for investment firms to adopt ‘best execution’ practices, which has a parallel with the requirement for corporates to maximise shareholder value. While this is a challenge, it is also an opportunity for treasurers to improve the efficiency of financial transactions. The ability to hold quality, up-to-date data across all accounts, signatories and mandates will assist in this process.
The main impact of Basel III on corporate treasury is the liquidity coverage ratio, which requires that banks hold sufficient ‘high quality’ liquid assets to meet all their net cash outflows over a 30-day window. High quality liquid assets are expensive collateral for banks to hold, so this increases the costs that banks must incur to hold a corporate’s deposits. The costs increase further for non-operational cash because of the higher expected runoff rate.
The most important steps leading CFOs and treasurers can take to mitigate the impact of Basel III are related to cash visibility: understanding their cash balances; knowing what timeframes are important to their bank and thinking of these timeframes when planning how to manage their cash; and perfecting cash forecasts.
Related reading: Four Steps to 100% Global Cash Visibility
Banks will not want excess non-operational cash - they will want guaranteed deposits, for example, and will reward such commitments. Establishing cash certainty will earn corporates better rewards from their bank and the ability to mobilise cash to alternative investments such as money market funds or more strategic investments, all which require more certainty in the availability of cash for long periods.
Many corporates use derivatives to hedge financial risks. Those that are defined as non-financial counterparties under the European Market Infrastructure Regulation (EMIR) may not be subject to all the requirements of the regulation, but they are required to report all their derivatives trades.
Reconciliation for each asset class traded is a considerable challenge given the sheer number of fields that have to be reported for each trade and the way reconciliations have to be structured.
The shortcomings of using spreadsheets for reporting has encouraged many corporates to use treasury management systems, which make it easier for companies to ensure compliance with EMIR by producing accurate reports on investments and hedging positions.
Related reading: Treasury Management System Implementation: A Worthwhile Challenge
While compliance challenges continue to evolve, treasury technology enables even small treasury teams to be more strategic, allowing them to get beyond basic compliance and contribute to business performance such as reducing cost of goods and services by optimising cash flow hedging programs. These technologies allow corporates to collaborate with banks and better navigate compliance burdens.
About Alex Wolff
Alex leads corporate and product strategy at Kyriba, where he is responsible for corporate strategy and messaging, marketing sizing, analyst relations, and product/pricing strategy in liaison with the product team.
Alex has more than 20 years of experience in treasury, banking, and financial software development. Most recently, Alex led the product strategy function at Finastra, one of the largest global software companies in the financial services sector. Prior to that, he was an expert associate partner for McKinsey’s treasury, risk and financial services practices. Alex has also held senior level positions at Wells Fargo, Bank of Ireland and SunGard.