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Amendments to IFRS 9, IAS 39 and IFRS 71 have now been issued to address uncertainties related to the ongoing reform of interbank offered rates (IBOR).

The amendments provide targeted relief for financial instruments qualifying for hedge accounting in the lead up to IBOR reform. 

Having issued its proposed amendments in May, the International Accounting Standards Board (the Board) completed its redeliberation process in August. The Board has now published its first-phase amendments.

Preparers will need to ensure their systems and controls are ready to provide investors with transparent disclosures about the impact of IBOR reform on their risk management.

Chris Spall
KPMG global IFRS financial instruments leader

Summary of the amendments

The amendments address issues affecting financial reporting in the period leading up to IBOR reform, are mandatory and apply to all hedging relationships directly affected by uncertainties related to IBOR reform.

Issue covered All companies with hedges affected by IBOR reform are required to…

The ‘highly probable’ requirement

… assume that the interest rate benchmark on which hedged cash flows are based is not altered as a result of IBOR reform when assessing whether the future cash flows are highly probable. Also, for discontinued hedging relationships, the same assumption is applied for determining whether the hedged future cash flows are expected to occur. 
Prospective assessments … assess whether the economic relationship between the hedged item and the hedging instrument exists based on the assumptions that the interest rate benchmark on which the hedged item and the hedging instrument are based is not altered as a result of IBOR reform.
Retrospective assessments (for IAS 39) … not discontinue a hedging relationship during the period of uncertainty arising from IBOR reform solely because the actual results of the hedge are outside the range of 80-125 per cent.
Eligibility of certain risk components (for a hedge of a non-contractually specified benchmark component of interest rate risk) … apply the separately identifiable requirement only at the inception of the hedging relationship. A similar exception is also provided for redesignation of hedged items in hedges where dedesignation and redesignation take place frequently – e.g. macro hedges.
End of application

… prospectively cease applying the exceptions at the earlier of:

(a)   when the uncertainty regarding the timing and the amount of interest rate benchmark based cash flows is no longer present; and

(b)   the discontinuation of the hedging relationship (or reclassification of all amounts from the cash flow hedge reserve).

The assessment of uncertainty should be performed on an item-by-item basis for hedges involving groups of items.

Disclosure (for hedging relationships directly affected by IBOR reform) 

… disclose:

  • the significant interest rate benchmarks to which hedging relationships are exposed;
  • the extent of risk exposure that is affected by IBOR reform; 
  • how the transition to alternative benchmark interest rates is being managed;
  • a description of significant assumptions or judgements made in applying the amendments; and
  • the nominal amount of the hedging instruments in those hedging relationships.

Next steps

Companies with hedges affected by IBOR reform may need to take steps to apply the amendments, which are mandatory and effective from 1 January 2020. Early application is permitted.

Meanwhile, the Board has started the deliberations on the second phase of this project – which will focus on financial reporting issues arising following the implementation of IBOR reform.

Look out for further updates and speak to your usual KPMG contact to find out more.

1IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures.