IBOR reform and the effects on financial reporting

Date recorded:

Issues leading up to IBOR reform (Agenda Paper 14)


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. In some jurisdictions, significant progress has been made towards replacing them by alternative, nearly risk-free rates (‘RFRs’), which are based, to a higher extent, on transaction data.

In this context, in December 2018 the Board decided to add to its standard-setting programme the IBOR Reform and its Effects on Financial Reporting project.

Highly probable requirement

Under IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments, when a forecast transaction is designated as a hedged item in a cash flow hedge, that transaction must be highly probable. In the future, as uncertainty from IBOR reform increases and time to transition approaches, it might be difficult to demonstrate that the designated IBOR cash flows are highly probable given the effects from IBOR reform. As a result, entities would have to discontinue hedge accounting prospectively when the designated forecasted cash flows are no longer highly probable.

In addition, if the cash flows become neither highly probable nor expected to occur due to the IBOR reform, this would lead to reclassify the amount accumulated in the cash flow hedge reserve to profit or loss. 

As a result, it is expected that the IBOR reform would have a significant impact on financial reporting and key accounting ratios for many IFRS preparers globally.

Prospective assessments

IFRS 9 and IAS 39 both require a forward-looking prospective assessment for a hedging relationship to qualify for hedge accounting for both fair value and cash flow hedges.

For hedging relationships going beyond the expected replacement of IBOR, these prospective assessments could be affected as they are performed on a forward-looking basis and potentially result in discontinuation of hedge accounting. As a result, changes in fair value of derivatives previously designated in any cash flow hedges would start being recognised in profit or loss (instead of the cash flow hedge reserve in other comprehensive income). Regarding derivatives previously designated in fair value hedges, offsetting would not be achieved in profit or loss because the hedged item would no longer be measured at fair value.

Risk components

IFRS 9 and IAS 39 allow entities to designate only changes in the cash flows or fair value of an item attributable to a specific risk or risks (risk component) if the risk component is separately identifiable and reliably measurable. The IBOR reform may impact market liquidity and as a result it may not be possible to designate IBOR and RFR as non-contractual specified risk components because the component may not be separately identifiable.

However, this issue appears to have a limited impact given that:

  • the affected population appears limited to RFR based hedging activities when the RFR market has not yet developed to provide a term structure of zero-rates.
  • the assertion of separate identifiability is required only at initial designation of a hedging relationship.

Staff recommendations

The staff recommends that the Board propose amending IFRS 9 and IAS 39 to provide optional relief from the effects of IBOR reform uncertainties as follows:

  • (i) IFRS 9 and IAS 39 should be amended to provide relief from the effects of IBOR reform uncertainties on the highly probable requirement.
  • (ii) IAS 39 and IFRS 9 should be amended to provide relief from the effects of IBOR reform uncertainties on the prospective assessments required in IFRS 9:6.4.1(c)(i) and IAS 39:AG105(a).
  • (iii) The Board should not amend the hedge accounting model in IFRS 9 and IAS 39 to provide relief for designation of risk components that are not separately identifiable.

Concerning the end of the relief, the staff makes the following recommendations:

  • Entities should stop applying the proposed relief when the earlier of the following occurs: i) the designated IBOR financial instrument is contractually amended to replace IBOR for the alternative RFR; or ii) the hedging relationship terminates.
  • Entities should apply the relief to the reclassification of the amount accumulated in the cash flow hedge reserve related to hedging relationships that have been previously discontinued for reasons other than IBOR reform until the earlier of i) contractual amendment; or ii) the cash flow hedge reserve has been fully reclassified to profit or loss.
  • Entities should not be permitted to apply the proposed relief for hedging relationships designated after the RFR is separately identifiable.

Entities should also provide specific disclosures about the extent to which they are applying the proposed relief.

The staff’s proposed timeline is to publish an Exposure Draft in April or May 2019 for a final issue of the amendment in November or December 2019. The staff recommends that entities should apply the proposed amendments retrospectively. The proposed effective date of the amendments is 1 January 2020 with earlier application permitted.


Board members were generally supportive of the staff recommendations but asked for more precise wording in the recommendations in order to ensure that the relief is as specific and limited as possible.

Some Board members also insisted that the message as to why reliefs are provided should be made clear as part of the objectives of the amendments and in wider communications from the Board. This would counter the risk that preparers expect broad reliefs because of the market-wide nature of the reform. The reliefs are not intended to offer protection against any turmoil in the market that may arise from the IBOR reform.

In addition, some Board members noted that the reason for introducing the reliefs is not that a major change in market structure, such as IBOR reform, was not contemplated during the development of IFRS 9 or IAS 39. The reliefs would rather be provided because the application of the existing requirements in the period of uncertainty could result in providing information that is not useful to the users of the financial statements.

The Board discussed the meaning of existing contractual terms, and in particular different types of contractual provisions dealing with the effects of IBOR reform (“fallback clauses”) as well as termination clauses. The staff considered three categories of fallback clauses: (i) general provisions that deal with market disruptions, (ii) more specific clauses that provide for the replacement of the IBOR by a specific RFR in the future, based on the formula that will be used in the markets at that time, and (iii) clauses that specify the date of the replacement and formula to be used. In the latter case, there is no longer uncertainty and therefore the relief would not apply. The staff will bring to the Board examples and specific wording to reflect those different circumstances. 

The staff also clarified that any amendments to a contract other than the replacement of IBOR would need to be considered when performing the prospective assessments. When performing these assessments and when measuring hedge effectiveness, it would be assumed that the IBOR-based cash flows continue. However, given that the hedging instrument is measured using market rates, the measurement of hedge effectiveness will continue to capture expectations of the market, including those in relation to the IBOR reform.

Some Board members noted that they disagreed with the view exposed by the staff in the agenda paper that the assertion of separate identifiability is required only at initial designation of a hedging relationship. In their view, this assertion is required throughout the existence of the hedging relationship. Accordingly, they favoured a relief to allow an entity to continue hedge accounting when an IBOR risk component was separately identifiable at inception but no longer meets this criterion due to the IBOR reform.

On the contrary, Board members considered that there should be no relief for new hedging relationships when the IBOR risk component does not meet the criterion at the start of the relationship.

Board members generally viewed that the relief should cease when there are no longer uncertainties about the future IBOR-based cash flows, as opposed to when the contract is amended. The specific requirements in relation to this end of relief will be discussed at a later meeting.

The Board briefly discussed whether additional disclosures should be required for instruments that are impacted by the IBOR reform but not in a hedging relationship. However, the Board noted that this would be covered by the existing disclosure requirements on material effects.

The staff will come back to the Board in March with recommendations on the question of whether the application of the relief should be optional or not.


All 14 Board members voted in favour of the following:

  • Regarding the ‘highly probable’ requirement, IAS 39 and IFRS 9 should be amended to provide relief from the effects of uncertainties around the general conditions (timing and specifics) of the potential replacement of IBOR. In particular, when assessing the likelihood that a forecast transaction will occur, an entity can assume the IBOR-based contractual terms will remain unchanged.
  • Regarding the prospective assessments, IAS 39 and IFRS 9 should be amended to provide relief from uncertainties around the general conditions (timing and specifics) of the potential replacement of IBOR. In particular, when performing these assessments, an entity should base such assessments on existing contractual cash flows from the hedging instrument and the hedged item.
  • An entity should be allowed to continue hedge accounting when an IBOR risk component meets the separately identifiable requirement at the inception of the hedging relationship, although identification may be affected by IBOR reform in the future. However, relief should not be provided for risk components that are not separately identifiable at the inception of a hedging relationship.
  • An entity should stop applying the proposed relief when the nature and timing of designated future cash flows are certain.
  • An entity should provide specific disclosures about the extent to which it applies the proposed relief.

The Board also agreed that an entity should apply the proposed amendments retrospectively, with a proposed effective date of 1 January 2020 and early application permitted (13 in favour).

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