On May 3, 2019, the International Accounting Standards Board (“IASB”) proposed amendments (“Exposure Draft”) to two accounting standards in response to concerns raised by the transition away from the London Interbank Offered Rate (“LIBOR”). Specifically, the Exposure Draft addresses International Financial Reporting Standard (“IFRS”) 9 Financial Instruments and International Accounting Standard (“IAS”) 39 Financial Instruments: Recognition and Measurement. The IASB is accepting comments on the Exposure Draft until June 17, 2019 and plans to issue final amendments later this year.
Interbank Offer Rates (“IBORs”), such as LIBOR, have traditionally been benchmark rates that were incorporated into various forms of financial agreements, including derivative agreements. However, regulators voiced concerns regarding the validity of the rates and their perceived shortcomings, such as being vulnerable to manipulation. In 2017, Andrew Bailey, chief executive of the U.K. Financial Conduct Authority (“FCA”), which has served as the regulator of LIBOR, announced that LIBOR would be transitioned to alternative rates by the end of 2021, after which point the FCA would no longer compel or persuade banks to contribute to LIBOR. In the United States, for example, the Federal Reserve created the Alternative Reference Rates Committee (“ARRC”) to identify and recommend an alternative rate. The ARRC ultimately recommended the Secured Overnight Financing Rate (“SOFR”) as the preferred replacement for U.S. LIBOR. Analogous working groups have similarly identified alternative rates for the other IBORs. While entities such as ARRC implement transition plans, however, market participants face uncertainty regarding the application of an ultimate fallback rate that can be used in the event that LIBOR is permanently discontinued.
The IASB identifies this as the motivation behind its most recent action, stating: “IFRS Standards require companies to use forward-looking information to apply hedge accounting. While interest rate benchmark reform is ongoing, uncertainty exists about when the current interest rate benchmarks will be replaced and with what interest rate. Without the proposed amendments, this uncertainty could result in a company having to discontinue hedge accounting solely because of the reform’s effect on its ability to make forward-looking assessments. This, in turn, could result in reduced usefulness of the information in the financial statements for investors.”
The Exposure Draft states that the proposed amendments “modify specific hedge accounting requirements so that entities would apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform.” See Exposure Draft at p. 6. Nevertheless, the proposed exceptions are not intended to provide any relief from any other consequences resulting from the interest rate benchmark transition.
You can view the IFRS Standards Exposure Draft here.
Comment letters can be submitted here.
Good day DR2.