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Interest Rate Benchmark Reform – changes to accounting standards

The London Interbank Offered Rate (LIBOR) is being replaced from 31 December 2021, with different jurisdictions setting their own rates. The UK will move to the Reformed Sterling Overnight Index Average (SONIA).

The International Accounting Standards Board (IASB) has issued amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial Instruments: Recognition and Measurement’, IFRS 7 ‘Financial Instruments: Disclosures’, IFRS 4 ‘Insurance Contracts’, and IFRS 16 Leases’. These amendments have also been UK-adopted IAS.The amendments only apply to changes required by the reforms to financial instruments and hedging relationships.

Key changes

A practical expedient for changes to contractual cash flows when assessing a modification of financial instruments.

Relief from specific hedge accounting requirements

The amendment enables, and requires, companies to continue hedge accounting in circumstances when changes to hedged items and hedging instruments arise as a result of the reform.

Because a company would make changes required by the reform to the hedged items and hedging instruments at various times, companies may need to amend a hedging relationship more than once.

Disclosures

The amendments to IFRS 7 require a company to make additional disclosures in its financial statements so that investors can better understand the reform’s effects on that company.

A company is required to disclose:

Transition and effective date

The amendments apply retrospectively, but companies are not required to restate comparative information. The amendments are effective for annual reporting periods beginning on or after 1 January 2021, with early adoption permitted.

If you would like to know how to prepare or require any further information, please contact Paul Merris.

authors:paul-merris