ESMA published a letter to IASB as a response to the IASB exposure draft on interest rate benchmark reform. ESMA supports the IASB initiative to provide, in a staged approach, a timely response to the increasing level of uncertainty about the possible financial reporting impact of the long-term viability of some interest rate benchmarks. Additionally, ESMA issued a letter to European Financial Reporting Advisory Group (EFRAG) on the draft comment letter of EFRAG on the IASB exposure draft on interest rate benchmark reform. Appendices to the letters set out detailed comments on the exposure draft of IASB.
The response letter to IASB highlights the following key points:
- ESMA agrees with the proposals set out in the exposure draft to amend old and new standards on financial instruments, namely IAS 39 and IFRS 9. The proposals address the issues that affect the application of hedge accounting requirements in the period before the replacement of an existing interest rate benchmark with an alternative interest rate, by setting out well-specified exceptions to the relevant requirements in IFRS 9 and IAS 39.
- ESMA recommends that IASB should consider providing clarifications about limitations on the application of the proposed exceptions, which are included in the basis for conclusions of the exposure draft, as amendments to the accompanying authoritative guidance of both IFRS 9 and IAS 39. This would promote consistent application and facilitate both implementation and enforceability of the proposed changes.
- ESMA urges IASB to proceed rapidly toward finalization of the proposed amendments, so that they can be applicable for the preparation of the 2019 annual financial statements.
- ESMA concurs with IASB that there are other issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative benchmark as part of a second phase. ESMA highlighted that addressing these "post-replacement" accounting issues is urgent and, therefore, encourages IASB to address these aspects as soon as possible.
In the view of ESMA, the next phase of the proposed changes should consider and address issues that relate, among others, to the application of the guidance on de-recognition and modification of financial instruments, the implications for the determination of fair value, and the implications on hedge accounting of changes in the contractual terms and in the contractual documentation.
Keywords: International, Europe, Accounting, Banking, IFRS 9, IAS 39, Financial Instruments, Hedge Accounting, IBOR, Interest Rate Benchmark, IASB, ESMA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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