United States

Amendments address interest rate benchmark uncertainty

FINANCIAL REPORTING INSIGHTS  | 

International Financial Reporting Standards (IFRS) require companies to meet certain requirements to apply hedge accounting, including demonstrating that hedged transactions are highly probable of occurring, and demonstrating that there is an economic relationship between the hedged item and the hedging instrument or that the hedge is expected to be highly effective in achieving offsetting. Ongoing interest rate benchmark reform has led to uncertainty about when the current interest rate benchmarks, such as interbank offer rates (IBORs) will be replaced and with what interest rate. This uncertainty could result in a company having to discontinue hedge accounting solely because of the reform’s effect on its ability to comply with these requirements.

The International Accounting Standards Board (IASB) recently issued amendments to IFRS 9, Financial Instruments, International Accounting Standard 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures. The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about the hedging relationships that are directly affected by these uncertainties.

The amendments are effective January 1, 2020. The IASB next will consider how to address any issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative interest rate.