The International Accounting Standards Board (IASB) has published an Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) in response to the ongoing reform of interest rate benchmarks around the world. The amendments aim to provide relief for hedging relationships.
Highly probable requirement and prospective assessments of hedge effectiveness
Where an entity currently designates IBOR cash flows, the replacement of IBORs with new interest rate benchmarks raises questions over whether it will be possible to make the assertion that those cash flows will still occur in a hedge of highly probable future cash flows, and whether the hedging relationship meets the requirements to be viewed as effective on a prospective basis. The Board therefore has provided exceptions for determining whether a forecast transaction is highly probable or whether it’s no longer expected to occur. Specifically, the amendments state that an entity should apply those requirements assuming that the interest rate benchmark on which the hedged cash flows are based is not altered as a result of interest rate benchmark reform.
Designating a component of an item as the hedged item
The changes amend the hedge accounting requirements in IFRS 9 and IAS 39 for hedges of the benchmark component of interest rate risk that is not contractually specified and that is affected by interest rate benchmark reform. Specifically, it states that an entity applies the requirement (that the designated risk component or designated portion is separately identifiable) only at the inception of the hedging relationship.
Without these amendments, the uncertainty surrounding the replacement of IBORs and the form this will take, could result in entities having to discontinue hedge accounting solely because of the reform’s effect on their ability to make forward-looking assessments. Disclosures about the extent to which an entity’s hedging relationships are affected by the amendments are also required. The amendments are not intended to provide relief if a hedging relationship no longer meets the requirements of hedge accounting for any other reasons than those included in the amendments.
In acknowledgement of the speed with which interest rate benchmark reform is progressing, the amendments are effective for annual periods beginning on or after 1 January 2020, with earlier application permitted. They should be applied retrospectively, with early application permitted. Grant Thornton welcomes the IASB’s amendments which provide relief from the effects of interest rate benchmark reform on hedge accounting. Reporting entities need clarity on the impact on hedge accounting urgently and are therefore pleased to see this first phase of this project finalised.