IBOR reform – Blueprint for modifications under IFRS® 9

• Potential changes to IFRS 9 to clarify guidance and provide a practical expedient for modifications relating to IBOR reform
• Existing IFRS 9 requirements would apply after the practical expedient for any other modifications
• Next steps – Next Phase 2 issue –hedge accounting – to be discussed at the Board’s November meeting

With Phase 1 complete and Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 issued in September 2019, the International Accounting Standards Board (the Board) has started its deliberations on second-phase issues.

Its first key area of focus in this second phase is classification and measurement of financial instruments or more specifically, how an entity might apply IFRS 9 Financial instruments when dealing with changes to contract terms arising from IBOR reform. 

Chris Spall,

KPMG’s global IFRS financial instruments leader

During its October meeting, the Board tentatively decided that ‘modifications related to IBOR reform’ are those that will result in changes – on an economically equivalent basis – to the interest rate benchmark on which a financial instrument’s contractual cash flows are based. 

In light of this, the Board tentatively decided to propose a practical expedient for these modifications to allow the effective interest rate (EIR) to be updated without adjusting the carrying amount to better reflect the economics of IBOR reform and reduce the operational burden for financial statement preparers.

The Board discussed these issues and tentatively decided the following.

After applying the practical expedient to modifications that relate only to IBOR reform, companies would apply the current IFRS 9 requirements to assess any other modifications to that financial instrument.

The Board also discussed certain accounting implications for the classification and measurement of financial instruments when a modification results in derecognition – i.e. the modification is substantial. The Board tentatively decided that the existing IFRS 9 requirements are adequate for:

• derecognising a financial instrument and the related accounting requirements for a substantial modification;
• determining the business model for managing the financial assets; 
• determining whether the new financial instrument referenced to alternative benchmark rates meets the SPPI criteria;
• recognising expected credit losses (ECL) for the new financial asset; and
• embedded derivatives for financial liabilities.

However, the Board tentatively decided to add an example to illustrate the application of the SPPI assessment in the context of IBOR reform.

The Board did not announce when an exposure draft on these potential changes might be issued and expects to discuss hedge accounting issues that would arise after the implementation of IBOR reform at its next meeting in November.

Look out for further updates and speak to your usual KPMG contact to find out more about the Board’s tentative decisions.