We comment on on FRED 74 'Draft amendments to FRS 102 - Interest rate benchmark reform (phase 2)

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30 Sep, 2020

We have published our comment letter on the Financial Reporting Council’s (FRC’s) Financial Reporting Exposure Draft (FRED) 74 'Draft amendments to FRS 102 - Interest rate benchmark reform (phase 2)'.

We are supportive of the overall approach to reflect the International Accounting Standards Board’s (IASB) proposals in ED/2020/1 Interest Rate Benchmark Reform – Phase 2: Proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (ED) in FRS 102 to the extent relevant in order to ensure the amendments are available to all entities on a timely basis and that no significant deviations occur between the International Financial Reporting Standards (IFRS) and UK Generally Accepted Accounting Practice (UK GAAP). As part of finalising the Phase 2 amendments (the final amendments) the IASB made some important changes to the original proposals in the ED that FRED 74 is based on. We believe some of these changes should be reflected in FRS 102 and have included our recommendations in the answer to Question 1 in the Appendix to the comment letter.

We support the key amendments proposed in FRED 74 that ensure that entities that apply hedge accounting will continue to do so as they transition to alternative benchmark rates and entities can apply the practical expedient to account for changes in the basis for determining contractual cash flows of a financial asset or financial liability that are required by the interest rate benchmark reform (IBOR reform) by updating the effective interest rate. We consider these as being the two most important elements of the proposals.

Given the speed at which market participants are choosing, or being required, to switch to new interest rate benchmarks, we encourage the FRC to act swiftly in finalising the amendments arising from this FRED.

Responses to the specific questions raised in FRED 74 are included in the full comment letter.

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