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IBOR Reform and the Effects on Financial Reporting – Phase I [Completed]

Effective date and transitional provisions:

The amendments will be effective for annual periods beginning on or after January 1, 2020 and must be applied retrospectively. Early application is permitted.

Last updated:

September 2019

 

Overview

Interest rate benchmarks such as interbank offer rates (IBORs) play an important role in global financial markets. These benchmarks index a wide variety of financial products worth trillions of dollars and other currencies, ranging from mortgages to derivatives.

Market developments have undermined the reliability of some existing benchmarks. In this context, the Financial Stability Board has published a report setting out recommendations to reform such benchmarks. 

Some jurisdictions have already made clear progress towards replacing existing benchmarks with alternative, nearly risk-free rates (RFR). This work has, in turn, led to uncertainty about the future of existing interest rate benchmarks, which may affect companies’ financial reporting.

In 2018, the International Accounting Standards Board (the Board) noted the increasing level of uncertainty about the long-term viability of some interest rate benchmarks and decided to add a project to its agenda to consider the financial reporting implications of the reform.

In its outreach with stakeholders, the Board identified two groups of accounting issues that could have financial reporting implications. These are:

  1. pre-replacement issues—issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative RFR; and
  2. replacement issues—issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative RFR.

At the time of the Board’s discussions leading to the Exposure Draft, the specific conditions and details of the replacement had yet to be finalized. The Board, therefore, decided to monitor developments in this area and, as more information becomes available, the Board will assess the potential implications of the replacement issues and determine whether it should take any action.

The Board decided to prioritize the pre‑replacement issues because they are more urgent. Therefore,the Ex­po­sure Draft pub­lished on May 3, 2019 addresses only the following hedge accounting requirements that are based on forward-looking analysis:

  1. the highly probable requirement;
  2. prospective assessments; and
  3. separately identifiable risk components.

Other than these specific amendments, the hedge accounting requirements would be unchanged.

On Sep­tem­ber 26, 2019, the IASB completed this project by issuing Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) which amend some of the existing IFRSs re­quire­ments for hedge ac­count­ing. The amend­ments are de­signed to sup­port the pro­vi­sion of use­ful fi­nan­cial in­for­ma­tion by com­pa­nies dur­ing the pe­riod of un­cer­tainty aris­ing from the phas­ing out of in­ter­est-rate bench­marks such as IBORs. The amend­ments mod­ify some spe­cific hedge ac­count­ing re­quire­ments to pro­vide re­lief from po­ten­tial ef­fects of the un­cer­tainty caused by the IBOR re­form. In ad­di­tion, the amend­ments re­quire com­pa­nies to pro­vide ad­di­tional in­for­ma­tion to in­vestors about their hedg­ing re­la­tion­ships which are di­rectly af­fected by these un­cer­tain­ties. For further details, refer to the Deloitte IFRS in Focus regarding these amendments to IFRS 9, IAS 39 and IFRS 7.

As noted above, the IASB has decided to follow a phased approach for its re­sponse to the re­form of in­ter­est-rate bench­marks. This project relates to Phase 1 and cul­mi­nates with the amend­ments detailed above which fo­cuses on the ac­count­ing ef­fects of un­cer­tainty in the pe­riod lead­ing up to the re­form. In August 2019, the IASB has now also started work on Phase 2, which con­sid­ers the po­ten­tial con­se­quences on fi­nan­cial re­port­ing of re­plac­ing an ex­ist­ing bench­mark with an al­ter­na­tive.  

 

Other Developments

September 2019

On September 26, 2019, the 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 January 1, 2020, with earlier application permitted.

July 2019

On July 29, 2019, the IASB® staff updated the work plan to indicate that the Board expects to review the Exposure Draft feedback in September 2019.

May 2019

On May 13, 2019, the AcSB issued its Exposure Draft that corresponds to the IASB’s Exposure Draft on this topic. Comments are requested by June 17, 2019.

On May 3, 2019, the IASB published an Exposure Draft Interest Rate Benchmark Reform (Proposed amendments to IFRS 9 and IAS 39) that constitutes a first reaction to the potential effects the IBOR reform could have on financial reporting. Comments are requested by June 17, 2019.

March 2019

On March 14, 2019, the IASB staff updated the work plan to indicate that the Board will issue an Exposure Draft in May 2019.

January 2019

On January 25, 2019, the IASB staff updated the work plan to indicate that the Board expects to issue an Exposure Draft in Q2/2019.

December 2018

On December 14, 2018, the IASB staff updated the work plan to indicate that the Board expects to issue an Exposure Draft in the first half of 2019.

September 2018

On September 20, 2018, the IASB staff up­dated the work plan to in­di­cate that the Board plans to decide the project direction in December 2018.

 

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