Phase I deals with pre-replacement issues—issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark, e.g. LIBOR, with an alternative RFR; and phase II will cover replacement issues—issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative RFR.
The objective of phase I is to ensure that hedging relationships do not fail to qualify for hedge accounting under either IFRS 9 or IAS 39 because of uncertainties arising from interest rate benchmark reform. For example, cash flow hedge accounting under both IAS 39 and IFRS 9 requires future hedged cash flows to be ‘highly probable’. The question arises as to whether, as at 2019 and 2020 year ends, variable rate cash flows in a floating rate loan can be considered ‘highly probable’ beyond the date at which the relevant IBOR is expected to cease being published (currently considered to be post 2021).
Following the exposure draft issued in May 2019, the IASB have reviewed all comments received and amendments to IAS 39 and IFRS 9 are expected as early as 30 September 2019. For corporates who apply UK GAAP, the hedge accounting requirements of FRS 102 are based on IFRS 9 and draft amendments to FRS 102 have also been issued by the Financial Reporting Council (FRC), refer FRED 72.
Phase II of the IASB IBOR reform project will focus on the replacement issues that impact hedge accounting when one interest rate benchmark is replaced with another in a contract. This will cover the detailed technical intricacies of how, what and when in hedge accounting relationships. The IASB are expected to start this phase in October 2019.