Interest rate benchmark reform – financial reporting implications

LIBOR (the London Inter-Bank Offered Rate) and many other interest rate benchmarks around the world are in the process of being reformedThis has led to increasing uncertainty about the long-term viability of these interest rate benchmarks and raised questions about the potential effect on hedge accounting.  

In response to these concerns the IASB has issued amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, and IFRS 7 Financial Instruments: Disclosures. The amendments apply to specific hedge accounting requirements and aim to avoid unnecessary discontinuation or prevention of hedge accounting as a result only of uncertainties arising from interest rate benchmark reform

The amendments are effective for periods beginning on or after 1 January 2020, with early adoption permitted. EFRAG has also responded quickly to this matter and has issued its draft endorsement advice on the IASB’s amendments in an effort to ensure that they are endorsed as quickly as possible for use in the EU.

Similar amendments are in the process of being developed by the Financial Reporting Council (FRC) for UK GAAP preparers.

It is worth noting that these amendments are just the first stage of work on this matter and are designed to deal with any financial reporting issues that might arise before a particular interest rate benchmark has been replaced (‘pre-replacement’ issues). The IASB and FRC will also be turning their attention to any financial reporting issues that might arise once an interest rate benchmark has been replaced (‘replacement’ issues) and further changes may well be on the horizon.

Resources and guidance

A Bitesize Briefing Financial reporting and interest rate benchmark reform – an introduction will be broadcast on 18 November. This briefing is available to all ICAEW and Financial Reporting Faculty members, and will outline why interest rate benchmark reform is relevant to financial reporting and help listeners consider whether they are likely to be affected.

Financial Reporting Faculty members will also be able to join a second follow up Bitesize Briefing Financial reporting and interest rate benchmark reform – getting prepared on 9 December. This second briefing will delve deeper into the amendments to IFRS and UK GAAP and highlight some factors to consider when preparing financial statements during this period of uncertainty over interest rate benchmark reform.

For more information on LIBOR transition generally you may wish to read the Financial Services Faculty article LIBOR transition: five things all businesses need to do now.

The Financial Reporting Faculty will continue to monitor the financial reporting implications of interest rate benchmark reform and provide further guidance as necessary. Details of the Financial Reporting Faculty, including how to join can be found here.