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IBOR reform and the effects on financial reporting [IASB only]

Date recorded:

Research project proposal (Agenda Paper 19)

Back­ground

IBORs are interest reference rates that represent the cost of obtaining unsecured funding, in a particular combination of currency and maturity, and in a particular interbank term lending market. Examples of such reference rates include LIBOR, EURIBOR and TIBOR.

IBORs are used as indexes in a wide variety of financial products, whether derivatives or credit products such as loans, structured products and bonds. The total estimated notional outstanding amount of contracts indexed to IBORs is over US$300 trillion.

Recent market developments have brought into question the long-term viability of those benchmarks. The Financial Stability Board (FSB) supports a reform based on a ‘multiple-rate approach’ that aims at both strengthening existing major IBORS and developing alternative, nearly risk-free reference rates (‘RFRs’). Progress has been made in this direction and, in some jurisdictions, alternative RFRs have been published, such as the Secure Overnight Funding Rate in the US and the reformed Sterling Overnight Index Average (SONIA) in the UK. In its latest progress report, however, the FSB has questioned the feasibility of sustaining some IBORs in the long term.

As a result, market participants and other stakeholders have started to consider the potential impact of discontinuing the IBORs. In addition to the numerous contractual and practical challenges that such a transition would create, there is increasing interest in the potential effects on financial reporting.

The staff considers it is important that the Board starts gathering evidence to be able to assess the effects of the IBOR reform given it could have a significant and widespread impact on financial markets and on financial reporting. They also noted that in the event of regulatory change the Board may need to react rapidly to avoid potential undesirable effects on financial reporting.

The proposed research project would be carried out over a period of three to six months and would include (i) monitoring the developments of the IBOR reform and understanding the potential accounting implications, and (ii) developing preliminary views on whether there are any implications for the existing accounting requirements and whether the Board would need to take any action.

Staff recommendation

The Staff recommended to add to the Board’s active research agenda a research project on the effects on financial reporting of potential discontinuation of IBORs.

Discussion

No Board members were opposed to the research project.

One Board member asked whether the research project would be conducted primarily in-house or whether it would require the staff to discuss it with external stakeholders. The staff noted that they have already started to discuss the topic externally.

One Board member challenged the urgency of the project. The staff noted that discussions on IBORs had started after the financial crisis but reforms were now likely in the near horizon.

The staff clarified that the project would not be limited to monitoring the proposed IBOR reforms and would consider whether there are any actions for the Board to consider in terms of standard-setting. The project will also aim at identifying which accounting questions and implications should be considered as a priority.

One Board member stressed that the project should consider the implications on financial instruments but also on other areas such as discounting in lease accounting and valuations under IFRS 13 Fair Value Measurement. Another member found it important that the project should identify both the industry changes that would not have an accounting impact and the industry changes that should be reflected in the accounting. The Board should aim at acting in a timely way so that those latter changes are recorded in the period in which they occur and to prevent a diversity of practices.

Board decision

The Board approved the staff’s recommendation to add to the Board’s active research agenda a research project on the effects on financial reporting of potential discontinuation of IBORs.

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