FRS13 and Treasury Policy
Author:
Niall O'Shea
[Excerpt] FRS 13 requires all listed companies (as well as all banks and a number of other institutions) to disclose significant amounts of information in their annual report regarding their use of derivatives and other financial instruments. Compliance with the standard is required for accounting periods ending on or after 23 March 1999.
What does the standard require?
The disclosures required by the standard fall into two principal categories: numerical and narrative. The numerical disclosures relate primarily to the year end position. The narrative disclosures on the other hand provide an insight into the risks faced by the company throughout the year and the company's use of derivatives and other financial instruments in hedging those risks. It is these narrative disclosures which are likely to be of most interest to shareholders, analysts and competitors.
The narrative disclosures required include:
· The sources of risk in the company;
· The company's risk management policies;
· The main financial instruments used by the company; and
· A comparison of the year end position with the company's policies.
The disclosures must relate to the "objectives and policies ... and strategies for achieving those objectives â?¦ as agreed by the directors". In other words, the disclosures must be consistent with the company's board approved treasury policy.
Preparing a formal treasury policy
In light of the introduction of FRS 13, I expect that a number of Irish corporates will have to set about preparing a formal treasury policy for approval by the board. Although different companies will be faced with different risks, there are a number of similarities across all industries in the procedure involved in preparing a treasury policy and the common features of such a policy.
In preparing the policy, it is important to understand the key financial risks faced by the company. These risks will include the risk of changes in exchange rates, interest rates and commodity prices as well as company specific factors. Management must understand whether the principal shareholders want the company to retain these risks or if they want the risks to be managed or reduced. The risk appetite of the board will also effect the decision on the level of financial risk the company is willing to bear.
Objectives, roles and responsibilities
The treasury policy will typically begin with a mission statement, setting out the role of the treasury department. It will then detail the exposures faced by the company and the personnel responsible for the measurement and management of these exposures under the terms set out in the policy, together with their roles. Before covering individual risk areas, the policy will normally include, amongst other items:
· whether the treasury function should operate as a cost centre or as a profit centre;
· a list of personnel authorised to enter into treasury transactions;
· whether the treasury function is to be centralised or decentralised;
· the existence of a treasury committee;
· the internal control mechanism; and
· the use of derivative master agreements
The policy will then go on to cover each of credit risk, currency risk, long term funding, investment management, interest rate risk, cash management, bank relationships etc. It is these aspects of the policy which will have the greatest impact on the disclosures required by FRS 13.
Accountancy Ireland Vol 31 No 6 December 1999