On 26 September 2019, the IASB published amendments to IFRS 9, IAS 39 and IFRS 7, thus completed the first phase of its project IBOR Reform and its Effects on Financial Reporting. The amendments address accounting issues prior to the change to alternative benchmark interest rates and shall avoid discontinuation of hedge accounting.
The final amendments are broadly consistent with the amendments proposed in the exposure draft ED/2019/1 Interest Rate Benchmark Reform that was issued in May. They provide relief to the following hedge accounting requirements:
- Highly probable criterion for cash flow hedges: When determining whether a forecast transaction is highly probable, a company shall assume that the interest rate benchmark on which the hedged cash flows are based is not altered.
- Assessment of the economic relationship between the hedged item and the hedging instrument (IFRS 9) or prospective assessment of hedge effectiveness (IAS 39): When performing prospective assessments, a company shall assume that the interest rate benchmark on which the hedging instrument and hedged item are based is not altered.
- Separately identifiable risk components: For hedges of a benchmark component of interest rate risk affected by the reform, a company shall apply the separately identifiable requirement only at the inception of such hedging relationships.
Further, the IASB decided upon the following additional reliefs:
- Exception to the retrospective assessment under IAS 39: This allows hedge accounting to be continued for hedging relationships whose effectiveness falls outside the 80-125% range.
- Relief with regard to the criterion of separate identifiability for macro hedges: Once a hedged item has been designated within a macro hedge, there should be no reassessment of whether the risk component is separately identifiable at subsequent redesignation(s) of that hedged item in the same hedging relationship.
- Simplifications of the disclosure requirements.
The amendments are mandatory and apply to annual periods beginning on or after 1 January 2020.
Click here for the IASB’s press release.
In the second project phase the IASB considers financial reporting issues that might arise when existing interest rate benchmarks are replaced with alternative interest rates.