During March 2020 - at the height of the coronavirus crisis, while credit spreads grew and equity markets faltered – billionaire Bill Ackman’s hedge fund Pershing Square made $2.6 billion from hedging using CDSs. In effect, Mr. Ackman used this credit derivative creatively to hedge an equity position. However, when the hedged position is existing debt instruments there may be a mismatch between measuring the protection at FV and measuring the backed assets, which will often be at amortised cost. One of the unique tools provided by IFRS 9 to the protection buyer: designating the exposure as at FVTPL.

IFRS 17 - the new revolutionary standard which aims to achieve comparability between insurers - may somewhat adversely impact that comparability by allowing considerable flexibility in estimating the discount rate curve used. The discount rate has significant implications on the financial statements of insurers. We believe that the standard should have created a certain hierarchy between the approaches it proposes, or a more comprehensive guidance of the manner of estimating the illiquidity premium and the required adjustments, as well as of the considerations to be taken into account.

The fact that more property owners are making concessions to their lessees than other credit providers suggests that some leases are in substance more akin to relationships with suppliers and service providers (operational relationships) than to relationships with financial creditors. An example of such a “soft” liability can probably be found among lessees who are retailers. When we come out on the other side of the crisis, it is only appropriate that accounting standard-setting boards (IASB and FASB) rethink this topic as part of the process of drawing lessons from the crisis.    

Traditional valuation models are irrelevant to companies in the new world, unless they take into consideration customer-based metrics. This is evident in the huge gap between Amazon’s market cap and its regular financial results. Thus, financial regulators should rethink the non-accounting reporting model of public companies – which is based on an old-world concept, where companies managed brands rather than customers.