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IBOR Reform and its effects on financial reporting

Description

Phase 1​

Interest rate benchmarks (e.g. EURIBOR) play a key role in financial markets. These benchmarks index trillions of euros in a wide variety of financial products, from derivatives to residential mortgages.

Currently such benchmarks are being replaced by alternative, nearly risk-free rates, which are based to a higher extent on transaction data.

The discontinuation of interest rate benchmarks could have a significant and widespread impact across financial markets, as well as in other areas where such benchmarks are used. In this context, stakeholders are considering what the effects of a discontinuation of these IBORs are on financial reporting.

The IASB has split its work on the Interest Rate Benchmark Reform in two phases. The first phase is addressing issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative interest rate and a second phase that deals with issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative interest rate.

To address issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative interest rate (discussed in details during the previous EFRAG TEG meetings), the IASB issued Exposure Draft ED/2019/1 Interest Rate Benchmark Reform (proposed amendments to IFRS 9, IAS 39 and IFRS 7) (the 'ED') on 3 May 2019. The ED covers the first phase of the Interest Rate Benchmark Reform and modifies hedge accounting requirements so that entities would apply them assuming that the interest rate benchmark on which the hedged cash flows and the cash flows from the hedging instrument are based will not be altered as a result of the reform. The proposals are not intended to provide relief from any other consequences arising from interest rate benchmark reform.

In response to the IASB's ED, EFRAG has issued its draft comment letter on 13 May 2019, which can be found here.

On 20 June 2019 EFRAG has published its final comment letter where EFRAG supports the IASB approach of working in two phases and urges the IASB to issue the amendments as soon as possible in order to provide clarity to the entities affected by the reform. EFRAG is of the view that the second phase should be addressed as soon as possible and in parallel to the finalisation of the first phase.

In its final comment letter, EFRAG generally supported the direction of the project. However, EFRAG recommended that the amendments should also:

  1. provide relief from including the uncertainties of IBOR reform in the retrospective assessment;
  2. permit the application of the proposed amendments retrospectively to hedges that were discontinued because entities were unable to apply the proposed reliefs; 
  3. clarify the application of the proposed amendments to a portfolio fair value hedge of interest rate risk and the use of cross-currency swaps; and
  4. reconsider the proposed disclosure, as qualitative disclosures are sufficient in this phase. 

EFRAG final comment letter is available here.

The IASB considered the comments received on the ED and issued the final amendments to the IFRS 9, IAS 39 and IFRS 7 on 26 September 2019. The Amendments address three of the four issues raised in EFRAG's comment letter (except issue 2).

On 30 September 2019, EFRAG has issued a draft of the Endorsement Advice on the IASB's amendmnets Interest Rate Benchmark Reform (proposed Amendments to IFRS 9, IAS 39 and IFRS 7) relating to the endorsement for use in the EU of the Amendments and, on 16 October 2019, finalised and published its Endorsement Advice, which is available here.

EFRAG's overall assessment is that the Amendments satisfy the criteria for endorsement for use in the EU and therefore EFRAG recommended their endorsement. 

Phase 2​​

Phase 2 of this project addresses so-called replacement issues that arise on transition from IBOR to an alternative benchmark rate. The objective of Phase 2 is to assist entities with providing useful information to users of financial statements and to support preparers in applying IFRS Standards when changes are made to contractual cash flows or hedging relationships, as a result of the transition to alternative benchmark rates.

On 9 April 2020, the IASB issued the Exposure Draft ED/2020/1 Interest Rate Benchmark Reform - Phase 2 (proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) ('the ED – Phase 2') with a comment period ending on 25 May 2020.

The IASB ED – Phase 2 represents the second phase of the IASB project addressing the impacts of the Interest Rate Benchmark Reform that affect financial reporting when an existing interest rate benchmark is replaced with an alternative interest rate and covers the following issues​:

  1. modifications of financial assets and financial liabilities, including lease liabilities;
  2. hedge accounting; and
  3. disclosures.
In response to the IASB's ED – Phase 2, EFRAG has issued its draft comment letter on 23 April 2020. The Comment Letter was finalised and poublished on 27 May 2020 and is available here.

The IASB published the amendments on 27 August 2020.

EFRAG published the draft of it's Endrsement Advice on 28 August 2020 with the comment period ending on 7 September 2020.​
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