IASB issues Interest Rate Benchmark Reform Phase 2
This Accounting Alert is issued to circulate the new amendments published by the International Accounting Standards Board (IASB) on Interest Rate Benchmark Reform in response to the ongoing reform of interest rate benchmarks around the world.
The IASB has published Interest Rate Benchmark Reform Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 4 and IFRS 16), finalizing its response to the ongoing reform interest rate benchmarks around the world. The amendments aim to assist reporting entities to provide investors with useful information about the effects of the reform on their financial statements. Many interbank offer rates (IBORs) are expected to be replaced by new benchmark Risk-Free Rates (RFRs) in future reporting periods. This has resulted in the IASB needing to address potential financial reporting implications after the reform in the interest rate benchmark. The IASB has completed this project in two stages, the first one focusing on providing relief for hedging relationships which was finalized in September 2019 by publishing Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7). This second set of amendments focus on issues arising post replacement, i.e., when the existing interest rate benchmark is actually replaced with alternative benchmark rates.
The main amendments in this final stage can be summarized as follows:
- Changes to contractual cash flows - IASB has added a practical expedient that will mean entities will not need to derecognize the carrying amount of financial assets or financial liabilities for changes required by the reform. Instead, reporting entities are required to account for the modification by updating the effective interest rate to reflect the change to the alternative benchmark rate.
- Hedge accounting requirements - If hedging still meets other hedge accounting requirements, entities will not need to discontinue hedge accounting purely because of changes as a result of the reform. Hedging documentation and relationships should be updated to reflect modifications to the hedged item, and entities can continue hedge accounting if the new hedging relationship meets all the criteria.
- Disclosures - Reporting entities will be required to make additional disclosures about new risks arising from the IBOR reform and how they manage those risks. There are also disclosure requirements for transitioning from IBORs to alternative benchmark rates.
Effective date and transition
The amendments are effective for annual periods beginning on or after January 1, 2021, with earlier application permitted. They should be applied retrospectively, and the restatement of prior periods is not required. However, entities can restate prior periods if it is possible without the use of hindsight.
See attached Accounting Alert for further details.