IASB amended IAS 39 and IFRS 9, which are the old and new standards on financial instruments, as well as IFRS 7, which is the standard on disclosures of financial instruments. The amendments modify certain hedge accounting requirements. The amendments are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as interbank offered rates (IBORs). The amendments also require companies to provide additional information to investors about their hedging relationships, which are directly affected by these uncertainties. The amendments come into effect from January 01, 2020 but companies may choose to apply them earlier. IASB will shortly publish a consultation on update to the IFRS Taxonomy to reflect these amendments.
The key amendments are related to the following:
- Highly probable requirement—According to IFRS 9 and IAS 39, when a forecast transaction is designated as a hedged item, that transaction must be highly probable to occur. 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 as a result of the reform.
- Prospective assessments—A hedging relationship qualifies for hedge accounting only if there is an economic relationship between the hedged item and the hedging instrument (described in IFRS 9) or the hedge is expected to be highly effective in achieving offsetting (described in IAS 39). Companies must demonstrate such prospective assessments on a regular basis. When performing prospective assessments, a company shall assume that the interest rate benchmark on which the hedged item, hedged risk, and/or hedging instrument are based is not altered as a result of the interest rate benchmark reform
- IAS 39 retrospective assessment—To apply hedge accounting under IAS 39, companies must demonstrate that the actual results of the hedge are within a range of 80%–125%. This requirement is commonly known as the IAS 39 retrospective assessment. In response to feedback on the exposure draft on interest rate benchmark reform, IASB decided to amend IAS 39 so that a company is not required to undertake the IAS 39 retrospective assessment for hedging relationships directly affected by the reform. However, the company must comply with all other IAS 39 hedge accounting requirements, including the prospective assessment.
IASB followed a phased response to the reform of interest rate benchmarks. Phase I culminates with these amendments and focuses on the accounting effects of uncertainty in the period leading up to the reform. IASB has started work on Phase 2, which considers the potential consequences on financial reporting of replacing an existing benchmark with an alternative. The staff has presented a preliminary list of potential accounting issues to be considered by IASB in Phase 2. IASB expects to commence the discussions about specific replacement issues in the fourth quarter of 2019.
Effective Date: January 01, 2020
Keywords: International, Accounting, Banking, IFRS 9, IAS 39, Financial Instruments, Hedge Accounting, Disclosures, Interest Rate Benchmark, IBOR, Phase I, Phase II, IFRS 7, IASB
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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