Interest Rate Benchmark Reform

In the UK, the FCA have announced a transition away from the London InterBank Offered Rate (LIBOR) to the Sterling OverNight Index Average (SONIA). By the end of 2021, the FCA will no longer seek to persuade, or compel, banks to submit to LIBOR. Interest Rate Benchmark Reform will impact entities reporting under IFRS and UK GAAP.

Companies that report under IFRS and UK GAAP and have applied hedge accounting for IBOR-related hedges, such as hedges of loans, bonds and borrowings with instruments such as interest rate swaps, interest rate options, forward rate agreements and cross-currency swaps will be affected by the Reform.

The Reform may also impact classification and measurement, fair value measurement and other accounting estimates where IBOR is a contractual term or is used as a component of the discount rate in determining that estimate.

We can help you with your transition from IBOR. We will walk you through the Reform from an accounting and financial reporting perspective. This includes;

• advice and support on the impact on hedge accounting and the potential relief that the IASB’s amendments or FRED 72 allow to navigate the uncertainty caused by the Reform
• the potential complexity that may arise on recognition, de-recognition and modification of financial instruments
• and any impacts that may arise if IBOR has been used as a component in discount rates.

Please get in touch with us to discuss how we can help or download our IBOR Reform brochure which sets out the status of IBOR Reform, the main areas where IBOR Reform may impact your business and your BDO contacts on IBOR Reform.

Talk to us

Download IBOR brochure

What is the impact of IBOR Reform on accounting and financial reporting?

1. The impact will be on the prevalent IBOR-based products such as LIBOR or EURIBOR linked loans, bonds and interest rate swaps.

2. Interest Rate Benchmark Reform has several potentially significant implications that can be categorised as:

• “Pre-replacement issues”: these are issues arising during the period of uncertainty prior to any Reform taking place, such as implications for specific hedge accounting requirements (under IAS 39, IFRS 9 and UK GAAP) which require forward-looking assessments.
• “Replacement issues”: these are issues arising at the time the Reform take place. For example, whether a modification of the contractual terms of a financial instrument to reflect the new rate should result in that financial instrument being derecognised and the implications of this on any hedge accounting relationships. The IASB will start deliberations on the main replacement issues during Q4 2019.
   

3. The amendments issued by the IASB (Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) and proposals outlined in FRC’s FRED 72 provide relief on specific aspects of pre-replacement issues that impact hedge accounting.

Entities applying hedge accounting requirements will be able to assume that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based are not altered as a result of Interest Rate Benchmark Reform.

The amendments do not provide relief from any other consequences arising from Interest Rate Benchmark Reform. Also, if a hedge accounting relationship no longer meets the requirements for hedge accounting for reasons other than those specified by these (proposed) amendments, then discontinuation of hedge accounting is still required. 

4. Interest Rate Benchmark Reform may be of particular concern or relevance to other aspects of your business’s accounting and financial reporting. For example, it may impact the estimation of pension liabilities for defined benefit obligations (under IAS 19 and Section 28 of FRS 102), incremental borrowing rates used in estimating lease liabilities (IFRS 16) and discount rates used in estimating value in use for goodwill impairment assessments (IAS 36 and Section 27 of FRS 102).

Interbank Exchange Rate Reform articles

The following articles and publications provide useful information and advice on IBOR Reform and its key features.   

• IBOR Reform – implications for hedge accounting and beyond
  This article sets out some of the accounting and financial reporting implications of the Reform and what the ED proposed to provide relief for.
   
• Relief from the effects of IBOR Reform – IASB amendments
  This article sets out the actual amendments and clarifications issued by the IASB in relation to pre-replacement issues that impact hedge accounting.