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IBOR reform and its effects on financial reporting — Phase 2

Date recorded:

Cover paper and summary of tentative decisions to date (Agenda Paper 14)

The purpose of this paper was to summarise the Board’s discussions and tentative decisions to date related to the IBOR Reform and its Effects on Financial Reporting – Phase 2 project.

This paper accompanied the following agenda papers:

  • Agenda Paper 14A “Phase 1 End of relief”, which discusses the end of application of the Phase 1 exceptions from specific hedge accounting requirements in IFRS 9 and IAS 39 in the context of interest rate benchmark reform (IBOR reform).
  • Agenda Paper 14B “Other IFRS Standards”, which discusses the potential effects of IBOR reform on IFRS Standards other than those related to financial instruments accounting.
  • Agenda Paper 14C “Disclosures”, which discusses potential disclosure requirements to accompany the tentative decisions the Board has made during Phase 2 of the IBOR project.

End of application—Phase 1 exceptions (Agenda Paper 14A)

The underlying principle of the Phase 1 amendments to IFRS 9 and IAS 39 issued in September 2019 is to provide exceptions to specific hedge accounting requirements such that entities would apply those requirements assuming the interest rate benchmark on which the hedged risk and/or cash flows of the hedged item or of the hedging instrument are based, is not altered as a result of IBOR reform. Those amendments specified that an entity would apply the exceptions while there are uncertainties about the interest rate benchmark designated as the hedged risk and/or the timing or amount of interest rate benchmark-based cash flows of the hedged item or the hedging instrument. However to ensure that the exceptions are not applied after the uncertainty was resolved, the Board included specific requirements for when the exceptions cease to apply and an entity would revert to applying the hedge accounting requirements in IFRS 9 or IAS 39 without applying the exceptions (referred to as ‘end of application’ in the amendments).

The purpose of this paper is to consider the interaction between the Board’s tentative decisions in Phase 2 of the project (as summarised in Agenda Paper 14) and the end of application requirements for the Phase 1 amendments to IFRS 9 and IAS 39 and whether any amends to the requirements should be made in this regard.

This paper does not discuss the interaction between the Phase 1 exception (with respect to the “separately identifiable” requirement) and Phase 2 tentative decisions with respect to the separately identifiable criteria. The staff analysis on the application of the separately identifiable criteria in the context of the Phase 2 tentative decisions will be discussed at the next Board meeting.

The paper first outlines the general end of application requirements, and the interaction with the tentative decisions on modifications as discussed in the October 2019 meeting. It then goes on to note that not all the Phase 1 exceptions apply at the hedging relationship level but are applied separately to the different elements of the hedging relationship, and so provides an analysis of the interaction of the tentative decisions to date with the Phase 1 exceptions for:

  • a) the highly probably requirement for cash flow hedges;
  • b) prospective assessments; and
  • c) IAS 39 retrospective assessments.

Staff recommendations

Following on from the analysis provided, the staff recommended that:

  • a) no additional guidance or amendments should be made to the current end of application requirements in IFRS 9 and IAS 39 with respect to the highly probable requirement for cash flow hedges;
  • b) no additional guidance or amendments should be made to the current end of application requirements in IFRS 9 and IAS 39 with respect to the prospective assessments; and
  • c) IAS 39 be amended to allow that, for the purposes of assessing retrospective effectiveness only, the cumulative fair values reset to zero at the date the exception to the retrospective assessment ceases to apply


General end of application requirements for Phase 1

A Board member asked about the implication of paragraph 16: “Therefore, when the hedged items or hedging instruments have been modified and the relevant changes to the hedging relationship and hedge documentation have been made, uncertainty about the interest rate benchmark designated as the hedged risk and the timing and amount of hedged cash flows are eliminated”. The member sought confirmation that for the relief that applies at the individual instrument level, the updating of the hedging relationship and hedge documentation is not a mechanism for extending the period of the phase 1 relief (i.e. that the statement should not be read as allowing an entity to keep the phase 1 exceptions running until they elect to update the hedge documentation). The staff confirmed the Board member’s understanding.

Another Board member said that paragraph 15, in reference to a modification where the practical expedient would apply, states that “the uncertainty would be resolved.” The member noted that that would not be the only case where uncertainty could be resolved. The member also noted the granularity of analysis that had been prepared for this project, and highlighted that they did not want people to read something unintended from the wording as a result. The staff responded by noting that paragraph 12 refers to contractual amendments and while they are expected to be the most common way are neither required to resolve uncertainty, nor are they the only way in which the uncertainty can be resolved.

Prospective assessments

No comments or questions were raised by the board

IAS 39 retrospective assessments

One Board member asked for clarification regarding the use of the “allow” in recommendation c) above, where the staff had used the word “require” when presenting the topic, i.e. whether entities would have the choice to apply the proposed amendment (to reset cumulative fair values to zero for the purposes of the retrospective assessment when the date the phase 1 exception ceases to apply). The staff note that their intention was to mean “require”, but will present a paper next month to talk further about this.

Another member asked that recommendation c) be amended to say “cumulative fair value changes reset to zero. All members supported the amended recommendation (i.e. require rather than allow and insert ‘changes’)

All members supported recommendations a) and b).

Other IFRS Standards (Agenda Paper 14B)

This paper discussed the potential effects of interest rate benchmark reform (IBOR reform) on IFRS Standards other than those related to financial instruments accounting.

The scope of Phase 2 is broader than the previous phase as it will encompass different areas of accounting for financial instruments as well as other areas of accounting. However, this does not mean that all issues will result in amendments to IFRS Standards to provide relief through exceptions to existing requirements. In particular, when IFRS Standards provide an adequate basis to account for a particular issue and the accounting outcome results in useful information to users of financial statements by faithfully representing the economic effects of IBOR reform, the staff do not believe that any amendments to current IFRS Standards are needed.

The staff have identified the following areas that could be affected, which are discussed in the paper:

  • IFRS 16
  • IFRS 17
  • IFRS 13
  • Discount rates; and
  • Insurance companies applying the temporary exemption from IFRS 9.

Staff recommendations

The staff recommended that:

  • a) IFRS 16 should be amended to provide a practical expedient, so that a lessee applies paragraphs 42(b) and 43 of IFRS 16 to account for lease modifications directly required by IBOR reform. More specifically, a lessee would re-estimate the variable lease payments linked to IBOR and revise the discount rate to reflect changes in the benchmark interest rate. No amendments are needed for lessor accounting.
  • b) IFRS 17 provides an adequate basis for an entity to account for modifications an entity makes to insurance contracts in the context of the IBOR reform, and that such accounting results in useful information to users of financial statements.
  • c) IFRS 13 already provides sufficient guidance to determine if and when a financial asset or financial liability should be transferred to a different level within the fair value hierarchy and that these transfers reflect the economic reality of IBOR reform, therefore providing useful information to users of financial statements.
  • d) the current IFRS Standards already provide adequate guidance to determine the appropriate accounting treatment for the potential impacts of the replacement of IBORs on discount rates.
  • e) amend IFRS 4 to allow insurers applying the temporary exemption to apply the amendments and practical expedient in accounting for modifications directly required by IBOR reform.


IFRS 16 Leases

A Board member said the idea here seems similar in concept to what they are going to put in IFRS 9—about when there is economic equivalence, and modifications arising as a direct consequence of IBOR reform—and asked if this would be the boundary that is proposed to be used in IFRS 16 as well. Additionally they sought to confirm that they would not be putting in the “two-step” approach they have in IFRS 9 (which involves looking at the modifications that are part of what is required as a result of reform, and then the second test of what is not). The staff confirmed they two steps are not necessary for IFRS 16 because if there are any other modifications, the entity should update the incremental borrowing rate reflecting the current conditions.

Another Board member asked, how the word “provide” should be read in the recommendations. The staff confirmed that again the intention is for it to mean “required”.

The vote was held on recommendation a) above, with 14 in favour.

IFRS 17 Insurance Contracts

13 votes in favour and 1 absent.

IFRS 13 Fair Value Measurement

One Board member noted that they agree with the recommendation, and that it is clearly important if there has been a change in the liquidity of a financial instrument—and that reflects the economics of that instrument—then that’s reflected in the fair value hierarchy. They highlighted however that any associated impact on regulatory metrics are an issue for regulatory bodies (and not the Board), which they may or may not choose to adjust for.

Another Board member asked whether the disclosure between the levels would be an IFRS 13 or IBOR reform requirement. Staff said this would be addressed by the existing IFRS 13 disclosures.

Another Board member asked as to whether the possible increase in level 3 classification is temporary. Staff noted that it is temporary in the sense that those instruments might be modified so that they refer to another rate and then they could move up the levelling hierarchy; but in terms of IBOR rate itself, the rate will not become more observable.

All Board members supported recommendation c).

Discount rates

All Board members supported recommendation d).

Insurance companies applying the temporary exemption from IFRS 9

In general, Board members said that they would vote in favour of the staff recommendation, but with a great deal of reluctance.

A Board member noted that this is going to be a very difficult decision to give effect to, because they would be adjusting something that does not actually exist in their own literature. They asked to understand the way that it was proposed this would be effected; e.g. would they cross reference in IFRS 4 the paragraphs in IFRS 9 that have been amended, and state that those paragraphs are applicable for those that are still applying IAS 39 (given that IAS 39, as it stands at the moment, doesn’t have exactly the same paragraphs). Or whether that is something still being considered.

The staff said they are still considering this. The Board member then noted that the issue highlights the complexities that the decision to allow certain insurance entities to continue applying IAS 39 creates.

Another Board member also focused on drafting difficulties, noting that these are that the modification requirements in IAS 39 are not the same as in IFRS 9—it is not as easy as stating “apply these paragraphs from IFRS 9”, because they do not fit with the “jigsaw” that is within IAS 39. The staff will  have to find a way to be make it understandable, workable, and clear enough; and that this would be non-trivial.

The Board member continued to highlight that, if the Board agrees with the staff recommendation, then there needs to be a very strong signal from the Board that people should not have an expectation that every time an amendment is made relating to IFRS 9 classification and measurement, that IAS 39 classification and measurement would be similarly amended for the handful of companies it is relevant to. The member expressed concern about the incentives they are creating through their decisions—that they had allowed the insurance companies to use the parts of IFRS 9 that those companies like (in the form of “own credit”), and are now proposing to give modification relief in IAS 39 also—however all the parts of IFRS 9 that are less wanted by insurance companies (such as expected credit losses) are not used.

Another member questioned whether they have any choice here, on the basis that the responses from those entities will likely be vocal about being singled-out to be penalised by the accounting standards, where other industries got practical expedients to apply. Another board member responded, noting that this is a reason as to why it is being recommended by the staff and supported by certain Board members—on balance, it is good for the market.

Another member noted that those companies applying IFRS 9 have practical expedients, whereas those that are permitted to continue applying IAS 39 have none, is not fair for those companies and cannot provide comparable information for users. They highlighted that the proposal is not to directly change the requirements of IAS 39, but to make changes to IFRS 4—which in itself is a temporary Standard—so they also believe the staff recommendation to be understandable, and that there is no alternative solution other than to change IFRS 4 to provide practical expedients for those companies applying IAS 39.

13 members supported recommendation e).

Disclosures (Agenda Paper 14C)

The purpose of this paper was to analyse whether any additional disclosure requirements need to accompany the tentative decisions the Board has made during Phase 2 of the IBOR Reform and its Effects on Financial Reporting project. If so, it must be determined what disclosures would provide users of financial statements with useful information about the effects of the transition to alternative benchmark rates on an entity’s financial statements.

At this meeting, the staff asked the Board to make a decision on the proposed disclosures for Phase 2 of the project as set out in the paper.

The staff noted that the transition from IBORs to alternative benchmark rates is likely to have broader implications on the entity’s business, financial statements and risks it is exposed to and how it manages those risks. As such it will be important for users of financial statements to be provided with information about the extent to which IBOR reform has resulted in changes to an entity’s business, the nature of the risks associated with this reform and how the entity is managing the process to transition to alternative benchmark rates.

In assessing whether additional disclosure requirements are needed to provide useful information to users of financial statements, the staff has considered:

  • a) the extent to which current presentation and disclosure requirements would provide information about the effect of IBOR reform on an entity’s financial statements;
  • b) the information needed by users of financial statements to enable them to understand the effects of the transition to alternative benchmark rates on an entity’s financial statements;
  • c) the incremental costs for preparers to disclose additional information and how that balances with the benefits of the relief that the Board is proposing to provide; and
  • d) the potential interaction with disclosures that are required as part of the Phase 1 amendments.

Staff recommendations

1. The staff recommended that IFRS 7 be amended to require entities to provide disclosures that enable users of financial statements to understand:

  • a) the nature and extent of risks arising from IBOR reform to which the entity is exposed to, and how the entity manages those risks; and
  • b) the entity’s progress in transitioning from IBORs to alternative benchmark rates, and how the entity is managing this transition.

2. To achieve this objective, an entity would disclose information about:

  • a) how it is managing the transition from IBORs to alternative benchmark rates, and the status/progress made at the reporting date;
  • b) the carrying amount of financial assets and financial liabilities, including the nominal amount of the derivatives, that continue to reference interest rate benchmarks subject to the reform, disaggregated by significant interest rate benchmark;
  • c) for each significant alternative benchmark rate that the entity is exposed to, an explanation of how the entity determined the base rate and relevant adjustments to the rate, to assess whether the modifications to contractual cash flows were required as a direct consequence of IBOR reform and have been done on an economically equivalent basis; and
  • d) the extent to which IBOR reform has resulted in changes to an entity’s risk management strategy and how the entity is managing those risks.


One member noted that, speaking for non-financial services preparers, thought the requests in recommendation 2 are reasonable. They would envision that for a corporate treasury department—if IBOR reform was material to their capital strategy—these items would the things they would care about, and would be tracking. Another member agreed with the recommendations, but they questioned what they were looking to achieve with the disclosure in 2(d). Entities will likely not change their risk management strategy because of IBOR reform. Rather, they believed that possibly due to the transition they have some additional risk, and recommended that operationally how they are managing that transition and risk is what is better to disclose.

The staff said they can reword the recommendation to combine recommendation 2 (a) and (d), such that they still capture the risks that are arising out of the reform. If they focus on that, and how the entity is managing its transition process and its progress on that, then that still achieves the objectives.

Another Board member noted that, while sympathetic to the previous Board member’s suggestion, they don’t know that there will not be a change to an entity’s risk management strategy as a result of the reform. If such a change were made, that would be useful information, and asked that this is included somehow in recommendation 2 (a) so if there is a change in the risk management strategy that would be communicated. Another Board member noted that if there was a change in risk management strategy it would be disclosed under IFRS 7 disclosures already, but could consider mentioning it.

Another Board member commenting on 2 (c) wanted to understand how the staff think a user of financial statements will use the information about how the entity has determined what the equivalent rate is—e.g. is that to force people to disclose enough information so that readers have confidence that preparers did a robust job with determining what the equivalent rate is? The staff said that was part of the expectation, but additionally it’s likely that there are other changes being made to the contract made concurrently, such as the credit spread might be revised. They noted that users they spoke to were concerned that entities might state that all modifications are required by the reform, and so hide things within that statement, and not show what the actual economic impact is. Their view was that if they can understand how the entity came up with the economically equivalent rate, it would be easier to see when there are other changes to the interest income over time, or similar, such that they can then figure out what those modifications were.

All Board members supported the recommendations.

In closing the meeting, the Staff noted that they are planning at the next meeting to bring papers on the effective date, the transition, and clarification on anything that needs to be “required”, as opposed to “optional” – and so whether the relief is mandatory or voluntary. They will also have a paper on the “separately identifiable” criteria and how they intend that to apply given the phase 2 tentative decisions. Then, if all goes well, they will ask the Board for permission to start the balloting process at that meeting.

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