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 addresses 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 deals with replacement issues, therefore, the proposed amendments published today are intended to address issues that might affect financial reporting when an existing interest rate benchmark is actually replaced.

Suggested changes

The changes proposed in ED/2020/1 Interest Rate Benchmark Reform — Phase 2 (Proposed 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 Board’s proposals for classification and measurement and hedge accounting.

• Modification of financial assets, financial liabilities and lease liabilities. The IASB proposes 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. For qualifying modifications, there would be no specific gain or loss associated with the replacement of the IBOR rate.
• Specific hedge accounting requirements. Under the IASB's proposals, hedge accounting would 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. Any valuation adjustments resulting from the amendments are recognised as part of ineffectiveness. Amended hedging relationship 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 exposure draft proposes that an entity would disclose information about
  • how the transition from interest rate benchmarks to alternative benchmark rates is managed and progress made at the reporting date,
  • the carrying amount of financial assets and financial liabilities that continue to reference benchmarks subject to the reform, disaggregated by significant interest rate benchmark,
  • for each significant alternative benchmark rate to which the entity is exposed, an explanation of how the entity determined which modifications qualified for the practical expedient, including a description of significant judgements the entity made to determine qualifying modifications, and
  • 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 proposes to amend 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 also proposes that the application of all proposed amendments should be mandatory. The IASB has also come to the conclusion 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 need to be specified.

Comments on the proposed changes are requested by 25 May 2020.

Effective date

The exposure draft proposes that the amendments would be effective for annual periods beginning on or after 1 January 2021 and would be applied retrospectively. Early application would be permitted.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Short Snapshot overview of the proposed amendments (link to IASB website)
• IFRS in Focus newsletter explaining the proposed amendments
• Our IAS Plus project page on IBOR reform and the effects on financial reporting — Phase 2