Featured Product

    ECB on Addressing Accounting Impact of Euro Risk-Free Rates Transition

    November 05, 2019

    ECB published a report that presents recommendations, from an accounting perspective, on the transition to new risk-free rates. This report by the private-sector working group on euro risk-free rates focuses on the implications, for IFRS and IAS, of the transition from the current euro overnight index average (EONIA) to euro short-term rate (€STR). It also focuses on the inclusion of fallback rates for EURIBOR based on a €STR-based term structure methodology. The recommendations cover three areas: the impact of the transition from EONIA to the €STR on the modification of contracts and hedge accounting, fallbacks for EURIBOR and hedge accounting, and general accounting and financial reporting.

    While the report primarily focuses on the EU Benchmarks Regulation implications for hedge accounting related topics, it also touches on challenges for non-hedge related topics. Implications for national generally accepted accounting principles (GAAP) do not fall within the scope of the report. The key recommendations of the working group include the following:

    • Preparers of financial statements should qualitatively and quantitatively assess whether changes to contracts resulting from the transition from EONIA to the €STR are substantial or non-substantial modifications.
    • IASB should address the issue of modifications of contracts and the potential risk of derecognition owing to the benchmark regulation and provide preparers of financial statements with specific guidance on how to treat changes of contracts driven by the reforms in the light of the existing IASB guidance on modifications of floating rate instruments.
    • Preparers of financial statements should assess whether EONIA component designated in hedge relationships is still reliably measurable throughout the transition.
    • Preparers of financial statements should evaluate whether the change in hedged risk from the transition from EONIA to the €STR will lead to the discontinuation of existing hedging relationships.
    • Preparers of financial statements should analyze the effect that a potential timing mismatch between the transition of the hedged item and the transition of the hedging instrument—as regards the switching of either the floating rate option or the discounting curve from EONIA to the €STR—would have on the effectiveness of the hedge relationship affected by the transition.
    • From a financial accounting perspective, market participants should try to reduce variability in fallbacks between different product classes (including derivatives) to a minimum as this would reduce technical implementation challenges and accounting complexity.
    • Preparers of financial statements should analyze if there are fallback scenarios under which hedge relationships need to be discontinued. They should also consider incorporating a provision for replacing benchmark interest rates in their hedge documentations for new contracts, and also, the risk of inconsistency when developing fallback provision triggers. This should be taken into account when amending existing contracts and setting up new contracts.
    • Where EONIA or EURIBOR-based valuation curves are replaced by the €STR curve or a curve based on a €STR-based term structure methodology, the preparers of financial statements should assess the potential impact of a change in value for financial instruments measured at fair value on the day of transition.
    • Preparers of financial statements should closely monitor the IASB project on IBOR reforms and any amendments or clarifications to the standards resulting from it.

    To ensure that these recommendations are adopted by all market participants, the working group has created a financial accounting and risk management sub-group that comprises representatives from European and international credit institutions, consulting and accounting firms, clearing houses, and investment management firms and associations. ECB, ESMA, EC, and Financial Services and Markets Authority (FSMA) all act as observers in the sub-group. The recommendations of the working group are not legally binding. They nevertheless provide guidance for market participants preparing for the transition to risk-free rates.


    Related Links

    Keywords: Europe, EU, Accounting, Banking, Securities, €STR, EONIA, Risk-free Rates, Benchmark Fallbacks, EURIBOR, Hedge Accounting, Interest Rate Benchmarks, Benchmarks Regulation, IFRS, IASB, ECB

    Related Articles
    News

    PRA Consults on Implementation of Certain Provisions of CRD5

    PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).

    July 31, 2020 WebPage Regulatory News
    News

    EIOPA Report Identifies Key Financial Stability Risks for Insurers

    EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Publishes Risk Dashboard for First Quarter of 2020

    EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Issues Updates on Stress Test Exercise for Banks in EU

    EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.

    July 30, 2020 WebPage Regulatory News
    News

    PRA Proposes Guidance Related to Matching Adjustment under Solvency II

    PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.

    July 30, 2020 WebPage Regulatory News
    News

    MAS Issues Guidance on Dividend Distributions by Banks

    MAS published a statement guidance on dividend distribution by banks.

    July 30, 2020 WebPage Regulatory News
    News

    APRA Updates Guidance on Capital Management for Banks

    APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.

    July 29, 2020 WebPage Regulatory News
    News

    FSB Report Reviews Macro-Prudential Framework and Tools in Germany

    FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.

    July 29, 2020 WebPage Regulatory News
    News

    EBA Urges Firms to Finalize Preparations for End of Brexit Transition

    EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.

    July 29, 2020 WebPage Regulatory News
    News

    SRB on Operational Continuity in Resolution and FMI Contingency Plans

    SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.

    July 29, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5606