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FRC proposes amendments to FRS 102

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29 May 2020

The Financial Reporting Council (FRC) has issued Financial Reporting Exposure Draft (FRED) 74 ‘Interest rate benchmark reform (phase 2)’.

Interest rate benchmarks such as the London Interbank Offered Rate (LIBOR) are being reformed, and it is anticipated that LIBOR will not be available after 2021. There is increasing uncertainty about the long-term viability of some interest rate benchmarks and this gives rise to issues affecting financial reporting in the period before the reform, particularly in relation to hedge accounting.

In response to the uncertainty, the FRC amended specific hedge accounting requirements in Section 12 of FRS 102 in December 2019, to provide relief that will avoid unnecessary discontinuation of hedge accounting as interest rate benchmarks are reformed.

The amendments in 2019 focussed on financial reporting issues arising before the reform of an interest rate benchmark. Further issues might affect financial reporting during the reform of an interest rate benchmark in respect of modifications to financial instruments, changes to hedging relationships and modifications to leases. FRED 74, which represents a second phase of amendments, focusses on these issues.

FRED 74 proposes amendments to the accounting requirements in Section 11 Basic Financial Instruments, Section 12 Other Financial Instruments Issues and Section 20 Leases to provide relief to minimise discontinuities in the accounting for financial instruments and leases, minimise reporting costs, assist entities in providing useful information to users of financial statements and avoid unnecessary discontinuation of hedge accounting as agreements are modified in order to transition to alternative benchmark rates. Entities will account for modifications as if they result from periodic re-estimations of cash flows to reflect changes in market rates of interest.

It is proposed that the amendments are effective for accounting periods beginning on or after 1 January 2021, with early application permitted. Comments are requested by 30 September 2020.

A press release and the draft amendments are available on the FRC website.

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