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Interest Rate Benchmark Reform – Phase II – International Accounting Standards Board

Date recorded:

At its meeting on December 11-12, 2019, the IASB met to discuss the hedge accounting issues that could result from the reform of interest rate benchmarks. The Board tentatively decided to:

(a) retain the requirements in IFRS 9 and IAS 39 that determine whether a hedging relationship should be discontinued after:

  1. a substantial modification that results in derecognition of the hedged item or the hedging instrument; or
  2. a modification that does not result in derecognition and is not required as a direct consequence of IBOR reform or is not done on an economically equivalent basis;

(b) amend IFRS 9 and IAS 39 to provide an exception from the current requirements so that the following changes in hedge documentation necessary to reflect modifications that are required as a direct consequence of IBOR reform and are done on an economically equivalent basis do not result in the discontinuation of hedge accounting:

  1. redefining the hedged risk to refer to an alternative benchmark rate; and
  2. redefining the description of the hedging instruments or the hedged items to refer to the alternative benchmark rate; and

(c) amend IAS 39 to provide an exception from the current requirements so that a change to the method used for assessing hedge effectiveness does not result in the discontinuation of hedge accounting when, due to IBOR reform, it is impractical to continue using the same method defined in the hedge documentation at the inception of the hedging relationship.

The Board also tentatively decided to amend IAS 39 to require an entity changing the hedged risk in the hedge documentation for a portfolio hedge of interest rate risk, as noted in (b)(i) above, to assume that all items included in the portfolio of financial assets or financial liabilities share the risk being hedged. For changes in hedge documentation noted in (b) and (c), an entity is required to continue to apply requirements in IFRS Standards to measure the hedging instrument and the hedged item and to recognize hedge ineffectiveness that may arise due to any consequential valuation adjustments required by IFRS 9 and IAS 39.

With regard to hedges of a group of items, the Board tentatively decided to amend IFRS 9 and IAS 39 so that, when items within a designated group are amended for modifications that are required as a direct consequence of IBOR reform and are done on an economically equivalent basis, an entity is permitted to: (a) amend the hedge documentation to define the hedged items by way of two subgroups within the designated group of items—one referencing the original interest rate benchmark and the other, the alternative benchmark rate; (b) perform the proportionality test separately for each subgroup of items designated in the hedging relationship; (c) treat the hedge designation as a single hedging relationship and amend the hypothetical derivative to reflect the combination of the subgroups of items; and (d) treat IBOR and its alternative benchmark rate as if they share similar risk characteristics (but only in relation to a group of items designated under IAS 39).

At future Board meetings, the Board will discuss: when the application of the exceptions provided in Phase 1 of the project will expire; the impact of IBOR reform on other IFRS Standards; disclosures; and transition and effective date of the proposed amendments.

Review the IASB Update and podcast on the Board's Web site.

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