ESMA published a letter responding to IASB on the exposure draft on the phase 2 of the interest rate benchmark reform. In its letter, ESMA welcomed the IASB initiative to consider as a priority the effects of the reform of the interest rate benchmark (replacement issues) on the financial statements of entities. ESMA also published a letter to the European Financial Reporting Advisory Group (EFRAG) on the draft comment letter of EFRAG on the IASB exposure draft on phase 2 of the interest rate benchmark reform. Annex 1 to both the letters contains suggestions to improve the current draft to ensure consistency and understandability of the proposed amendments to IFRS 9.
In the response letter to IASB, ESMA supported proposals regarding additional disclosures and agrees with the proposed effective date and transition provisions, which would ensure comparability across entities and apply at the relevant period of issuers’ transition to alternative benchmark rates. It also supported the proposals to limit the scope of the amendment to the modifications arising from the interest rate benchmark reform. Additionally, ESMA agreed with the proposal to prescribe a practical expedient to account for the modification of a financial asset or liability that is required by the interest rate benchmark reform. ESMA encouraged IASB to
- clearly exclude the possibility that this amendment can be applied by analogy to circumstances other than those for which they were developed
- include, in addition to those proposed in paragraph 6.9.4, examples of modifications of a financial asset or financial liability, which would not meet the conditions described in paragraph 6.9.3 of the exposure draft
Other proposals that ESMA supported involve accounting for the amendment of the designation of qualifying hedging relationships and relate to the designation of risk components and portions. In light of the market disruption linked to the COVID-19 pandemic, ESMA recommended in the letter that IASB continue to monitor future developments of alternative rate markets to assess whether it may become necessary to extend the 24-month temporary relief period for the separately identifiable assessment, since the establishment of sufficiently liquid alternative rate markets could take longer than currently envisaged.
Keywords: International, Europe, Accounting, Banking, IFRS 9, IBOR, Interest Rate Benchmark, Disclosures, Financial Instruments, COVID-19, 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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