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

In 2019, the European Securities and Markets Authority (ESMA) was commissioned by the EC to carry out research on potential short-term pressures in securities markets. The results, published in December 2019, included the finding that ESMA's investigation did not identify any need for amending existing accounting requirements. Rather, ESMA suggested three other areas where decisive action would support long-term investment behaviour:

• amending the Non-Financial Reporting Directive to establish principles for high quality non-financial information along with a limited set of specific disclosure requirements;
• promoting a single set of international ESG disclosure standards; and
• requiring the inclusion of non-financial statements in annual financial reports.

Notwithstanding these findings, the new EC consultation document contains the following question:

Question 16: Do you see any further areas in existing financial accounting rules (based on the IFRS framework) which may hamper the adequate and timely recognition and consistent measurement of climate and environmental risks?

The question can be answered with yes/no/don't know. However, only when answering "yes", a new question 16.1 pops up that allows the respondent to elaborate. Four areas where the accounting rules may prove contrary to sustainable finance are then suggested (impairment and depreciation rules, provision rules, contingent liabilities, and other) and it is possible to provide details.

Please click to access the consultation on the EC website. Comments are requested by 15 July.

The IFRS Foundation initiated the new compilation series in October 2019 and will continue it by publishing new volumes biannually in April and October. For more information, see the press release and compilation on the IASB website.

The objective of the document is to indicate the accounting implications of COVID-19-related government initiatives, including how IPSAS and other IPSASB guidance deal with transactions and events which arise because of the pandemic. The publication does not constitute an authoritative pronouncement of the IPSASB, nor does it intend to amend, or override the requirements of existing IPSAS or provide further implementation guidance.

Please click to access the publication on the IPSASB website.

Specifically, the Trustees are seeking individuals who have a preparer focus. For more information, see the updated release on the IASB’s website.

The statement notes that the responsibility for developing and maintaining high quality standards resides with the IASB and welcomes the IASB's recent educational material that addresses the application of accounting for expected credit losses in accordance with IFRS 9 Financial Instruments during the period of economic uncertainty arising from the COVID-19 outbreak. IOSCO also notes that the related financial instruments principles-based disclosure requirements in IFRSs (i.e. IFRS 7, IAS 1) should result in disclosure that considers the impact of the important emerging issues.

Please click to access the statement on the IOSCO website.

The consultation page can be accessed here. Please note that you need to register in order to access the public consultation.

The European national enforcers of financial information monitor and review financial statements published by issuers with securities traded on a regulated European market and who prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law.

ESMA has developed a confidential database of enforcement decisions taken by individual European enforcers as a source of information to foster appropriate application of IFRS.

The publication of enforcement decisions is designed to inform market participants about which accounting treatments European national enforcers may consider as complying with IFRS, i.e. whether the treatments are considered as being within the accepted range of those permitted by IFRS. ESMA considers the publication of the decisions, together with the rationale behind them, will contribute to a consistent application of IFRS in the European Union.

Topics covered in the latest batch of extracts, covering the period from May 2018 to October 2019, include:

Click for access to the full report (link to ESMA website). The ESMA has also published an updated overview of all enforcement decisions ever published.

European enforcers examined the financial statements of about 950 issuers representing an average examination rate of 17% of all IFRS issuers with securities listed on regulated markets. These examinations resulted in 299 actions taken to address material departures from IFRS.

Enforcers also assessed the non-financial information related to ESG for 937 issuers, covering approximately 35% of the total estimated number of issuers required to publish a non-financial statement, resulting in 95 enforcement measures.

In addition, 712 management reports were reviewed for evaluating compliance with ESMA’s guidelines on alternative performance measures, covering around 13% of all IFRS listed issuers in Europe against which were taken 109 corrective actions.

Please click to access the full report on the ESMA website.

A full list of appointees is available on the IASB's website.

On 17 December 2019, the IASB published the exposure draft of a new standard General Presentation and Disclosures that is intended to replace IAS 1 Presentation of Financial Statements.

If circumstances permit, EFRAG will host the joint outreach event in person in its offices in Brussels on 19 May 2020.

For more information, see the press release on the EFRAG’s website.