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IBOR Reform and its effects on financial reporting

Description

​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 with a comment period till 31 May 2019. The letter 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 reforms. 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.

EFRAG considers the IASB proposals as a step in the right direction but notes that additional changes are necessary. In particular, relief from including the uncertainties of IBOR reform in the retrospective assessment is needed.

Further, EFRAG disagrees with not applying the proposed amendments retrospectively to hedges that were discontinued because entities were unable to apply the proposed reliefs, and suggests to assess whether structuring opportunities would not arise as a result of the ED not allowing reinstatement of such hedges.

EFRAG also notes that the IASB should clarify the application of the Amendments to the portfolio fair value hedge of interest rate risk and the use of cross-currency swaps.

EFRAG is not convinced that the proposed disclosures strike an appropriate balance from a cost-benefit perspective and is of the view that during the first phase qualitative disclosures are sufficient. For the second phase EFRAG asks the IASB to open a dialogue with users to identify their information needs in relation to the IASB proposals.

EFRAG's comment letter contains a number of topics that could potentially be addressed in the second phase. Finally, EFRAG invites the IASB to address all potential impacts of the Interest Rate Benchmark Reform across the different IFRS Standards during the second phase.

EFRAG final comment letter can be found here.

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