Kumar Dasgupta, IASB Technical Staff
“The Board decided to address IBOR’s pre-replacement issues as a priority”
The IASB has identified two groups of accounting issues regarding the Interest Rate Benchmark Reform (IBOR Reform). The first are Phase I pre-replacement issues, affecting financial reporting before the replacement of an existing benchmark with a risk-free-rate (RFR). The second are Phase II replacement issues, affecting financial reporting once the benchmark is replaced with a RFR.
The IASB exposure draft (ED) issued in May 2019 addresses issues related to Phase I, proposing exceptions to specific hedge accounting requirements in IAS 39 and IFRS 9 to provide relief during the period of uncertainty. The ED proposes reliefs on three areas, to ensure that hedge accounting will continue until when IBOR is replaced with a RFR:
- Highly probable requirement
- Prospective assessments
- Risk components
Applying the exception to the Highly probable requirement, an entity would assume that the interest rate benchmark on which the hedged cash flows are based is not altered when assessing whether the future cash flows are highly probable. Therefore the entity would assume that no amendments will be made to the IBOR-based cash flows.
Similarly, on Prospective assessments the entity would perform such assessments assuming no amendments will be made to future cash flows as a result of interest rate benchmark reform.
Regarding Risk components that are not contractually specified, there may be a challenge in identifying components that may change. For example, when hedging mortgages at prime using LIBOR, if the LIBOR curve were to disappear it would become difficult to identify a risk component. Consequently the exception proposes that assessing whether a risk is separately identifiable should be performed only at inception of the hedging relationship.
Amendments to IFRS 17 – Insurance contracts (IFRS 17)
Due to the overlap with many banking and insurance contracts, the exposure draft issued in June proposes additional scope exclusions for IFRS 17:
- The first item would be loans that transfer significant insurance risk or allow the borrower to settle by ceding the asset to the lender. The proposal is to permit an entity to choose either IFRS 17 or IFRS 9 in the circumstances, but not to split the two items out separately.
- Another consideration is Credit cards, which often contain insurance coverage. The proposal is that an entity would not apply IFRS 17 to credit cards for which the fee charged to the customer does not reflect an assessment of the insurance risk associated with that individual customer. Instead, the entity would apply other relevant and applicable IFRS standards (e.g. IFRS 9, IFRS 15, or IAS 37)
Kumar noted that the timeline for this particular area is longer, considering that IFRS 17 will become effective as of 1st January 2022.
Agenda Decision published by the IFRS Interpretations Committee
Kumar noted that the proposed amendments to the IFRS Foundation Due Process Handbook reflect that entities should be entitled to ‘sufficient time’ to consider an agenda decision published by the IFRS Interpretations Committee and if necessary, implement an accounting policy change. As a rule of thumb it is fair to say that the IASB had in mind a matter of months rather than years.
Dynamic risk management
In July a complete package will be brought to the Board. It is planned to be in the form of a slide pack and not a white paper, although it will be rather extensive. The pack provides detailed information on how the dynamic risk management model is proposed to work, and considers a number of simplifications. During the second half of 2019, the IASB plan to conduct an outreach exercise on the core model asking for inputs and feedback on the core model. Based on the feedback received, the IASB will determine the next steps.
Financial Instruments with Characteristics of Equity (FICE)
The project remains important, but is receiving reduced attention from the Board, given the need to focus on the IBOR reform and dynamic risk management projects. The IASB has received 126 comment letters on this item to date. Key topics arising from the feedback included:
- Support for the idea of changing the current liability or equity classification guidance, but a lack of agreement on the nature and extent of the changes
- Support for enhanced disclosure
- Support for having only two categories — liability or equity
- Concern about the ‘amount’ feature
The Staff will present the feedback to the Board during the upcoming IASB meetings, following which the project direction will be decided.