Background

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.

The IASB addressed the issues in a project split into two phases: Phase 1 dealt with pre-replacement issues (issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark). This part of the project was concluded on 26 September 2019 by publishing Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7).

Phase 2 of the project dealt with replacement issues, therefore, the amendments published today address issues that might affect financial reporting when an existing interest rate benchmark is actually replaced. This part of the project has been concluded by the issuance of today's amendments.

Changes

The changes in Interest Rate Benchmark Reform — Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) relate to the modification of financial assets, financial liabilities and lease liabilities, specific hedge accounting requirements, and disclosure requirements applying IFRS 7 to accompany the amendments regarding modifications and hedge accounting.

• Modification of financial assets, financial liabilities and lease liabilities. The IASB introduces a practical expedient for modifications required by the reform (modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis). These modifications are accounted for by updating the effective interest rate. All other modifications are accounted for using the current IFRS requirements. A similar practical expedient is proposed for lessee accounting applying IFRS 16.
• Hedge accounting requirements. Under the amendments, hedge accounting is not discontinued solely because of the IBOR reform. Hedging relationships (and related documentation) must be amended to reflect modifications to the hedged item, hedging instrument and hedged risk. Amended hedging relationships should meet all qualifying criteria to apply hedge accounting, including effectiveness requirements.
• Disclosures. In order to allow users to understand the nature and extent of risks arising from the IBOR reform to which the entity is exposed to and how the entity manages those risks as well as the entity’s progress in transitioning from IBORs to alternative benchmark rates, and how the entity is managing this transition, the amendments require that an entity discloses information about
  • how the transition from interest rate benchmarks to alternative benchmark rates is managed, the progress made at the reporting date, and the risks arising from the transition;
  • quantitative information about non-derivative financial assets, non-derivative financial liabilities and derivatives that continue to reference interest rate benchmarks subject to the reform, disaggregated by significant interest rate benchmark;
  • to the extent that the IBOR reform has resulted in changes to an entity’s risk management strategy, a description of these changes and how is the entity managing those risks.

The IASB also amended IFRS 4 to require insurers that apply the temporary exemption from IFRS 9 to apply the amendments in accounting for modifications directly required by IBOR reform.

The IASB has come to the conclusion that the application of all proposed amendments is mandatory. It also assessed that the nature of the proposed amendments is such that they can only be applied to modifications of financial instruments and changes to hedging relationships that satisfy the relevant criteria and, as such, no specific end of application requirements needed to be specified.

Effective date and transition

The amendments are effective for annual periods beginning on or after 1 January 2021 and are to be applied retrospectively. Early application is permitted. Restatement of prior periods is not required, however, an entity may restate prior periods if, and only if, it is possible without the use of hindsight.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Project summary (link to IASB website)
• Our UK Accounting Plus project page on IBOR reform and the effects on financial reporting — Phase 2

In addition to the amendments, the IASB has also published a corresponding proposed IFRS Taxonomy update (comments requested by 28 September 2020).

The FRC has published a recording of the joint webinar with the IASB on the General Presentation and Disclosures Exposure Draft, which was held on 6 August 2020. The comment period closes on 4 September 2020 and the FRC's draft comment letter can be found here.

Further information can be found here and the webinar is available here.

Participants of the field-test were asked to apply the IASB's proposals to their financial statements and answer a questionnaire from EFRAG and the IASB. The results were then discussed in the workshop.

Please click for additional information and the report from the workshop on the EFRAG website.

Results from a similar workshop with financial institutions were released in September 2020.

In May 2020, the International Accounting Standards Board (IASB) published 'Covid-19-Related Rent Concessions (Amendment to IFRS 16)' which provides practical reliefs for preparers accounting for Covid-19-related rent concessions.

This amendment is effective for annual reporting periods beginning on or after 1 June 2020, but may also be applied early; however, the amendment is still subject to EU endorsement, which is expected to complete during Autumn 2020, and EU law is still applicable in the United Kingdom during the transition period following EU exit.   

Both the European Securities and Markets Authority (ESMA) (per statement on 21 July 2020) and the Financial Conduct Authority (FCA) (per statement on 18 August 2020) have also confirmed that they will not ‘prioritise supervision action’ relating to issuers’ decisions on whether or not to apply the reliefs that the amendment provides for, noting that where issuers’ use the reliefs, they will diverge from IFRS 16 as currently endorsed by the EU.

The FRC will similarly not pursue regulatory action against companies taking advantage of the reliefs permitted by the amendment.  The reliefs apply for both annual and interim accounts. If companies use the reliefs permitted by the IFRS 16 amendment, they are expected to disclose this in the notes to their financial statements. 

The FRC reminds directors of the need to ensure that the impact of applying this amendment, prior to EU adoption, on the lawfulness of any distributions is carefully considered. It also expects auditors to comply with all their obligations, for example, any requirement to report under s837 of the Companies Act 2006.

Click here for the press release on the FRC website.

The guidance sets out the minimum requirements that must be met, provides some best practice examples and also indicates the underlying principles that should be adopted in preparing the information for reporting on sustainability within the annual reports and accounts.

The guidance is applicable to all central government bodies that fall within the scope of the Greening Government Commitments (i.e. departments, non-ministerial departments, agencies and non-departmental public bodies) and which produce annual reports and accounts in accordance with HM Treasury's Government Financial Reporting Manual (FReM). These bodies are required to report on sustainability (unless exempt from doing so).

The press release and guidance are available on HM Treasury website.

In our comment letter on the consultation draft, we especially note two points:

• The IIRC should especially focus on collaboration with framework and standard-setters to achieve a consolidated and comprehensive system of standards and to achieve connectivity between non-financial and financial reporting standards; and
• the IIRC should support deeper engagement between the IIRC and the Trustees of the IFRS Foundation to create a clearer path towards a single system with connected oversight of standards for all forms of corporate reporting while also advocating for a broadening of the Trustees’ remit.

We also note that the subject of assurance has not been included in the consultation. We believe the IIRC should play an important role in enhancing the ‘assurance readiness’ of the Framework.

Please click to access out full comment letter here.

A recording of this webinar is available on the IASB's website.

The Handbook continues to note that agenda decisions do not have the status of IFRSs and cannot add or change requirements in the standards, however, it now also states that in many cases an agenda decision includes explanatory material that explains how principles and requirements in IFRSs apply to the transaction or fact pattern described in the agenda decision. As these explanations "may provide additional insights that might change an entity’s understanding of the principles and requirements in IFRS Standards", the Handbook states that entities might determine that they need to change an accounting policy as a result of an agenda decision. The Handbook goes on to note: "It is expected that an entity would be entitled to sufficient time to make that determination and implement any necessary accounting policy change."

The additional due process step regarding agenda decisions consist of the Board being asked whether it objects to the agenda decision. Two aspects will be considered:

• Whether the Board objects to the Interpretations Committee’s decision that a standard-setting project should not be added to the work plan; and
• whether the Board objects to the Interpretations Committee’s conclusion that the agenda decision does not add or change requirements in IFRS Standards.

If four or more Board members object, the agenda decision is not published and the Board decides how to proceed.

Please click for the following additional information on the IASB website:

• Press release
• Revised Due Process Handbook
• Amended IFRS Foundation Constitution with narrow-scope amendments to reflect the changes to the Due Process Handbook
• Project summary and feedback statement
• Article by Alan Beller, Chairs of the IFRS Foundation Trustees’ Due Process Oversight Committee, on the due process and why it matters

In that context the CFA Institute published a consultation paper that defines ESG-related features as components or capabilities of investment products that can be combined in different ways to meet different investor needs. It identifies the following six ESG-related features:

• ESG integration;
• ESG-related exclusions;
• Best-in-class;
• ESG-related thematic focus;
• Impact objective; and
• Proxy voting, engagement and stewardship.

The features are expected to serve as a backbone of the standard in that they are a mechanism to connect investor needs and disclosure requirements.

The CFA Institute seeks input on the consultation paper from the wider investment community to help shape an exposure draft, which is expected to be released in May 2021.

Responses on the consultation paper are requested by 19 October 2020. The paper, a response form for providing comments, and volunteer opportunities in connection with developing the new standard are available on the CFA Institute website.

This Taxonomy update includes elements to reflect the new disclosure requirements introduced by the recently-issued amendment to IFRS 16.

For more information, see the press release and Taxonomy update on the IASB’s website.