X

Blog Article

IBOR Reform – Accounting Implications

Tuesday 19 November 2019

Interest rate benchmarks (such as LIBOR, EURIBOR and TIBOR) play a key role in global financial markets. These benchmarks index trillions of dollars in a wide variety of financial products, from derivatives to residential mortgages. However, the veracity of these benchmarks has been in question since the financial crisis. Regulators worldwide have decided to change these existing interest rate benchmarks to alternative benchmarks that are more representative of risk-free rates (RFRs) and that are set using a more transparent market-based process. The discontinuation of interest rate benchmarks will have a significant and widespread impact across financial markets, including financial reporting.

The demise of IBOR will have a number of financial reporting consequences, as well as implications for the valuation of financial instruments, ranging from simple loans to complex derivatives.

In the area of financial reporting these consequences will be different at different points. Firstly, these arise in the period leading to the date of transition from the existing interest rate benchmark to the new risk-free rates (RFRs). This is the period in which we are now. During this phase, areas such as hedge accounting that require forward-looking analyses, for example the ‘highly probable’ requirement for forecast transactions and the demonstration of the existence of an economic relationship, according to IFRS 9: Financial Instruments, or expectation that the hedge will be highly effective in achieving offsetting, as per IAS 39: Financial Instruments: Recognition and Measurement will be impacted. Given the uncertainty regarding the continuation of IBORs it is possible that interest rate hedges will fail in the near future without relief from the IASB.

The second group of issues will arise when a jurisdiction actually moves or transitions from IBORs to the new RFRs. For example, issues will arise concerning the assessment of whether a change in the contractual cash flows or terms of a financial instrument is a substantial modification or if such modifications result in the derecognition of existing financial instruments and the accounting implications of recognising modified financial instruments as ‘new’ financial instruments.

The IASB has on its agenda a fast track project to address the accounting challenges arising from IBOR reform. It has already published one set of amendments to IFRS 9 and IAS 39 to address problems arising from the first phase, i.e. in the period leading up to IBOR reform. The IASB has provided relief from certain requirements that enable hedge accounting to continue in the period leading to IBOR reform. It is currently deliberating what relief to provide when the transition from IBORs to new RFRs actually happens, i.e. for the second phase. The amendments already published by the IASB provide timely relief to preparers of financial statements and should be considered by all those who are impacted by IBOR reforms.

About the Author

Kumar Dasgupta

Kumar Dasgupta

Kumar Dasgupta is a highly experienced IFRS professional who until recently was the Technical Director at the IASB in charge of all projects on IFRS 9 Financial Instruments. He was also responsible for projects dealing with fair value measurement under IFRS 13 for financial instruments at the IASB. Prior to that Kumar was a consulting partner with PriceWaterHouseCoopers advising companies, financial institutions and government bodies on treasury, credit risk and accounting matters. In addition Kumar has also worked with Barclays Capital UK. In his various roles Kumar has presented extensively to companies, banks and government bodies including the Basel Committee on Banking Supervision and the European Union to mention but a few. Kumar is a Chartered Accountant from UK and India and alumni of London Business School where he did the Sloan Masters specialising in quantitative finance. Currently he is pursuing a doctoral at the University of Sheffield.

Related Articles

Weekly Catch-Up 20th November

A ruling requiring President Trump’s lifelong accountancy firm to turn over his accounts has been t...

Read More >

Weekly Catch-Up 7th November

A report has been published by the private sector working group on euro risk free rates with recomme...

Read More >

Weekly Catch-Up 11th October

The Financial Reporting Council’s new Chairman has accelerated plans to create a new regulator in o...

Read More >

Weekly Catch-Up 3rd October

In response to amendments made to the IFRS 17 standard by the International Accounting Standards Boa...

Read More >

Weekly Catch-Up 26th September

An accounting Error at M&C Saatchi has forced the company to downgrade its profit forecast in their ...

Read More >

Weekly Catch-Up 17th September

So far a handful of fashion retailers have detailed their costs to date with regards IFRS 16. The im...

Read More >

Stay Updated with IASeminars

Join 20,000+ other professionals on our global mailing list.

Settings