IBOR Reform and its effects on financial reporting
- Exposure draft consultation
- Didier Andries, Galina Borisova
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.
Recently such benchmarks are in the process of 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.
On 3 May 2019, the IASB issued the Exposure Draft ED/2019/1 Interest Rate Benchmark Reform (proposed amendments to IFRS 9 and IAS 39) (the 'ED') with a comment period of 45 days ending on 17 June 2019.
The ED covers the first phase of the Interst 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.
EFRAG considers the IASB proposals to be an appropriate solution in addressing the inability to meet specific forward-looking hedge accounting requirements due to uncertainty that exists around the transition of interbank offered rates (IBORs).
EFRAG is aware the IBOR reform creates more accounting issues than the ones addressed in the Amendments. EFRAG supports to focus during phase I on the pre-replacement issues only and lists in the Appendix II of the comment letter a number of topics that could potentially be addressed in the second phase (replacement issues).
EFRAG has issued its Draft Comment Letter on 13 May 2019. Comments to the letter can be submitted till 31 May 2019. The letter can be found here.
Publications open for comments
13/05/2019 - EFRAG's draft comment letter on the IASB's ED/2019/1 Interest Rate Benchmark Reform (proposed amendments to IFRS 9 and IAS 39)
EFRAG has published its draft comment letter in response to the IASB's Exposure Draft ED/2019/1 Interest Rate Benchmark Reform (proposed amendments to IFRS 9 and IAS 39) and seeks constituents' views on the proposals. Comments on the draft comment letter are requested by 31 May 2019.