IASB consults on changes to accounting for interest rate benchmarks

The International Accounting Standards Board (IASB) is consulting on changes to the old and new financial instruments standards, IAS 39 and IFRS 9, in light of the reform of interest rate benchmarks such as interbank offer rates (IBORs)

The amendments to IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement are designed to make it easier for banks to manage the transition to a new approach and provide relief from specific hedge accounting requirements that could have resulted in the discontinuation of hedge accounting solely due to the uncertainty arising from interest rate benchmark reform.

The Financial Stability Board (FSB) has undertaken a fundamental review of major interest rate benchmarks following a number of criticisms of the previous approach, which involved banks agreeing a series of estimates.  Its report set out recommendations to reform some major interest rate benchmarks such as IBORs.

Public authorities in many jurisdictions have since taken steps to implement those recommendations. In some jurisdictions, there is already clear progress towards replacing the existing interest rate benchmarks with alternative, nearly risk-free interest rates that are based, to a greater extent, on transaction data (alternative interest rates). This has, in turn, led to uncertainty about the long-term viability of some existing interest rate benchmarks.

IFRS standards require companies to use forward-looking information to apply hedge accounting. The board says that while interest rate benchmark reform is ongoing, uncertainty exists about when the current interest rate benchmarks will be replaced and with what interest rate.

Without the proposed amendments, this uncertainty could result in a company having to discontinue hedge accounting solely because of the reform’s effect on its ability to make forward-looking assessments. This, in turn, could result in reduced usefulness of the information in the financial statements for investors.

Hans Hoogervorst, IASB chair, said: ‘The board has responded quickly to propose changes that will help address the uncertainties surrounding IBOR reform until the outcome of the reform is clear.’

The board is considering the accounting implications arising from the reform in two stages. The proposed amendments in the current exposure draft relate to the effects of uncertainty in the period leading up to the replacement of interest rate benchmarks. As more information becomes available about the replacements, the board will then assess the potential accounting implications of reform and determine whether to take further action.

The comment deadline is 17 June 2019, and IASB plans to issue final amendments later in 2019.

IASB Interest Rate Benchmark Reform Proposed amendments to IFRS 9 and IAS 39

Pat Sweet

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