Ongoing interest rate benchmark reform has led to questions regarding the transition to alternative benchmarks and related effects on the financial statements. The International Accounting Standards Board recently issued Interest Rate Benchmark Reform – Phase 2, which is a package of amendments to International Financial Reporting Standards meant to help companies provide financial statement users with useful information about the effects of the reform on their financial statements. This complements the amendments issued in September 2019 to certain hedge accounting requirements to provide relief from interest rate benchmark uncertainty. Interest Rate Benchmark Reform – Phase 2 focuses on the effects on financial statements when a company replaces the old interest rate benchmark with an alternative benchmark rate as a result of the reform, and amends specific requirements related to:
- Modifications to contractual cash flows – A company will not have to derecognize or adjust the carrying amount of financial instruments, including lease liabilities, for modifications required by interest rate benchmark reform but will instead update the effective interest rate to reflect the change in the interest rate benchmark.
- Hedge accounting – A company will not have to discontinue its hedge accounting solely because of replacing the interest rate benchmark if the hedge meets other hedge accounting criteria.
- Disclosures – A company will be required to disclose information about new risks arising from the interest rate benchmark reform and how it manages the transition to alternative benchmark rates.
The amendments are effective for annual reporting periods beginning on or after January 1, 2021. Early adoption is permitted.