What Happens in Phase 2
After it became apparent that the interest rates had been manipulated, a reform of the reference interest rates, such as EURIBOR and LIBOR, was started at the end of 2012. The IASB has concerned itself intensively with the impact on the accounting that the reform has had and initiated a two-phase project to take a look at any alleviations possible for the accounting and reporting.
In our November newsletter we spoke about the end of Phase 1, i.e. the changes made to IAS 39, IFRS 9 and IFRS 7. Phase 1 dealt with the temporary exemption from specific hedge accounting requirements applicable to hedge transactions which had been affected by the IBOR reform. The idea behind these alleviations was that the IBOR reform doesn’t necessarily have to end hedge accounting.
While Phase 1 mostly looked at the impact before a reform of the reference interest rates, Phase 2 now looks at the possible impact at the time when the new benchmark will actually go live. The period of insecurity will then have ended and the alleviations that had been granted in Phase 1 for the use of hedge accounting will by then also have ended.
The IBOR reform will require some contractual adjustments. However, there will also be contracts that do not require any adjustments in themselves but where the calculation method of the underlying reference interest rate will change. Currently, the IASB is thinking of treating both scenarios in the same manner, i.e. just like a modification - in other words with IFRS 220.127.116.11. As far as the modifications are concerned, industrial corporations will primarily be affected in their financial obligations. A modification considered substantial would entail a derecognition of the financial obligation in accordance with IFRS 18.104.22.168. A non-substantial modification could cause an unexpected adjustment of the carrying value, affecting operating results.
In order to keep the impact of the reform as low as possible, the IASB has for the moment decided to also foresee alleviations for companies during Phase 2. These specifically concern the qualification that a company may first use IFRS 9 B5.4.5 for changes in variable interest rates caused by the IBOR reform. This standard allows changing actual interest rates for instruments subject to variable interest rates if this is caused by a change in market rates, so that these changes do not cause changes in carrying values affecting operating results. The IASB announced that it would prepare examples of how to handle such situations, which will clarify which modifications may be attributed to the IBOR reform and which cannot.
Other topics that the IASB will treat during Phase 2 is the reform’s impact on other standards, especially disclosures to be made in the notes. Also currently under discussion is under which circumstances hedge accounting may be continued once the alleviations of Phase 1 expire.
In order to avoid later surprises and to be aware of the possible impact of the IBOR reform already now, companies are well advised to take stock of all of their financial instruments that could be affected by the IBOR reform and to check these in detail.
Source: KPMG Corporate Treasury News, Edition 97, December 2019
© 2020 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Aktiengesellschaft nach deutschem Recht und ein Mitglied der globalen KPMG-Organisation unabhängiger Mitgliedsfirmen, die KPMG International Limited, einer Private English Company Limited by Guarantee, angeschlossen sind. Alle Rechte vorbehalten. Für weitere Einzelheiten über die Struktur der globalen Organisation von KPMG besuchen Sie bitte https://home.kpmg/governance.