IASB Finalizes Changes Under Phase 2 of Interest Rate Benchmark Reform

The amendments are aimed at helping companies to provide investors with useful information about the effects of the reform on those companies’ financial statements. The amendments complement those issued in 2019 and focus on the effects on financial statements when a company replaces the old interest rate benchmark with an alternative benchmark rate as a result of the reform. The amendments in this final phase relate to:

• Changes to contractual cash flows—A company will not have to de-recognize or adjust the carrying amount of financial instruments for changes required by the reform, but will instead update the effective interest rate to reflect the change to the alternative benchmark rate
• Hedge accounting—A company will not have to discontinue its hedge accounting solely because it makes changes required by the reform, if the hedge meets other hedge accounting criteria
• Disclosures—A company will be required to disclose information about new risks arising from the reform and how it manages the transition to alternative benchmark rates

In September 2019, IASB had amended IFRS 9, IAS 39, and IFRS 7 to address, as a priority, issues affecting financial reporting in the period before the reform of an interest rate benchmark, including the replacement of an interest rate benchmark with an alternative benchmark rate (Phase 1 amendments). After issuing the Phase 1 amendments, IASB commenced Phase 2 of its project. Now, in August 2020, IASB has issued further amendments to IFRS standards, concluding its work in response to the reform. The Phase 2 amendments address issues that might affect financial reporting during the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate (replacement issues).

Keywords: International, Accounting, Banking, Insurance, Interest Rate Benchmarks, Benchmark Reforms, IBOR, Phase 2, IFRS 9, Financial Instruments, IFRS 4, Insurance Contracts, IASB