This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.
Article:

Relief from the effects of IBOR Reform – IASB amendments

14 October 2019

In response to the uncertainty arising from the phasing out of Inter Bank Offered Rates (IBORs), the IASB has published Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7. We introduced the background behind this Reform and discussed the IASB’s original Exposure Draft (ED) Interest Rate Benchmark Reform: Proposed amendments to IFRS 9 and IAS 39’ in a previous article. In this article we consider the final published amendments (the application of which is mandatory).

Why did the IASB need to make these amendments?

IBOR Reform brings about several potentially significant implications for entities reporting under IFRS both during the period of uncertainly prior to the Reform taking place (pre-replacement issues) as well as at the time the Reform takes place (replacement issues). These recently published amendments focus solely on pre-replacement issues and were considered necessary to prevent certain hedge accounting relationships being discontinued as a direct result of the uncertainties IBOR reform creates.

Which areas do the final amendments affect?

The amendments affect specific hedge accounting requirements in both IAS 39 and IFRS 9 as well as related disclosure requirements in IFRS 7. The original ED proposed reliefs on a number of forward-looking hedge accounting requirements (eg whether a forecast transaction is highly probable) as well as a relief from the requirement to separately identify risk components. These reliefs have been retained in the final amendments.

Following feedback on the original ED, the IASB decided to include a number of additional reliefs on other specific aspects of cash flow and fair value hedge accounting and the related disclosure requirements. It is important to note that while the reliefs will prevent certain hedge accounting relationships from being discontinued, any hedge ineffectiveness arising must still be recognised in profit or loss. The table below sets out a summary of the key reliefs.

Requirement

Description of amendment/ relief

Highly probable / expected to occur

When assessing whether a forecast transaction is highly probable or whether a hedged future cash flow is expected to occur assume that IBOR-based contractual terms are not altered as a result of IBOR Reform.

Prospective effectiveness

 

 

When making prospective effectiveness assessments (ie whether there is an economic relationship under IFRS 9 or whether the hedge is expected to be highly effective under IAS 39), assume that the IBOR-based contractual cash flows from the hedging instrument and the hedged item are not altered as a result of IBOR Reform.

 

Separately identifiable risk components

 

As long as a non-contractually specified IBOR risk component meets the separately identifiable requirement at inception of the hedge accounting relationship, hedge accounting should be continued.

 

Retrospective effectiveness

 

When assessing whether a hedge accounting relationship is retrospectively effective under IAS 39, relief from the 80 – 125% requirement during the period of uncertainty has been provided. 

 

Separately identifiable risk components for macro hedges

 

When an entity frequently resets a hedge accounting relationship in a macro hedge, the non-contractually specified IBOR risk component only needs to meet the separately identifiable requirement at the point the hedged item was initially designated within that hedge accounting relationship.

 

Disclosures

When an entity initially applies the amendments, the quantitative disclosure requirements set out in paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors are not required.

 


Further changes

In addition to the additional reliefs, the final amendments make the following clarifications/changes:

  • Scope: it has been clarified that, while the amendments should only apply to hedge accounting relationships that are directly affected by the IBOR Reform, this does not preclude their application to scenarios where interest rate risk is not the only risk being hedged. For example, the amendments would apply to (only) the interest rate risk element of a hedge accounting relationship in which both interest rate and foreign currency risk are being hedged.
  • Groups of hedged items: the end of application requirements which dictate when an entity should cease to apply the reliefs have been clarified in the context of groups of hedged items.
  • Disclosures: the IFRS 7 disclosure requirements that were originally proposed in the ED have been simplified and are now mainly qualitative rather than quantitative in nature.

When are the amendments effective?

The amendments are to be applied retrospectively for accounting periods beginning on or after 1 January 2020 with earlier application permitted (subject to EU endorsement). However, it is important to note that retrospective application in this context applies only to:

  • Those hedge accounting relationships that existed at the beginning of the reporting period in which the amendments have first been applied (or were designated thereafter), and
  • Amounts recognised in the cash flow hedge reserve that existed at the beginning of the reporting period in which the amendments have first been applied.

For help and advice on financial instruments related matters, please get in touch with your usual BDO contact or Mark Spencer.

BUSINESS EDGE INDEX