On 26 September 2019, the International Accounting Standards Board (IASB) published 'Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)' as a first reaction to the potential effects the IBOR reform could have on financial reporting. The amendments are effective for annual periods beginning on or after 1 January 2020, with earlier application permitted.
Interbank offered rates (IBORs) are interest reference rates, such as LIBOR, EURIBOR and TIBOR, that represent the cost of obtaining unsecured funding, in a particular combination of currency and maturity and in a particular interbank term lending market. Recent market developments have brought into question the long-term viability of those benchmarks. Therefore, work is underway in multiple jurisdictions to transition to alternative risk free rates (RFRs) as soon as 2020. Such rates will be based on liquid underlying market transactions, and not dependent on submissions based on expert judgement. This will result in rates that are more reliable and provide a robust alternative for products and transactions that do not need to incorporate the credit risk premium embedded in the IBORs.
The IASB followed a phased response to the reform of interest-rate benchmarks. Phase 1 culminates with the amendments issued on 26 September 2019 and focuses on the accounting effects of uncertainty before IBOR is replaced with an alternative RFR, i.e. the pre-replacement issues. In September 2019, the IASB also started work on Phase 2, which considers the potential consequences on financial reporting of replacing an existing benchmark with an alternative. The first output from this phase of the project will be an exposure draft expected in the first half of 2020.
The recent amendments deal with issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative interest rate and address the implications for specific hedge accounting requirements in IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, which require forward-looking analysis. (IAS 39 is amended as well as IFRS 9 because entities have an accounting policy choice when first applying IFRS 9, which allows them to continue to apply the hedge accounting requirements of IAS 39.) There are also amendments to IFRS 7 Financial Instruments: Disclosures regarding additional disclosures around uncertainty arising from the interest rate benchmark reform.
The changes in Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7):
- modify specific hedge accounting requirements so that entities would apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows from the hedging instrument are based will not be altered as a result of interest rate benchmark reform;
- are mandatory for all hedging relationships that are directly affected by the interest rate benchmark reform;
- are not intended to provide relief from any other consequences arising from interest rate benchmark reform (if a hedging relationship no longer meets the requirements for hedge accounting for reasons other than those specified by the amendments, discontinuation of hedge accounting is required); and
- require specific disclosures about the extent to which the entities’ hedging relationships are affected by the amendments.
The amendments are effective for annual periods beginning on or after 1 January 2020, with early application permitted. The amendments are applied retrospectively to those hedging relationships that existed at the beginning of the reporting period in which an entity first applies the amendments or were designated thereafter, and to the gain or loss recognised in other comprehensive income that existed at the beginning of the reporting period in which an entity first applies the amendments.
More information about these amendments is available in IFRS in Focus from September 2019.
Sources: IFRS in Focus (September 2019), www.ifrs.org, www.iasplus.com
The article is part of dReport – October 2019, Accounting news.