Long-term payables and receivables will, by their nature, be more affected by IBOR reform and, although the interest rate receivable or payable on cash equivalents such as deposits or money market funds will change, this is unlikely to have a material accounting impact due to their short-term nature.

Inter-company arrangements are also unlikely to be the focus of attention for some groups. However, where external variable-rate debt has been passed to another group company on a back-to-back basis, both companies will need to ensure that the intra-group loan is also updated and/or that the external finance costs are still covered.

Many groups have complex debt arrangements. This publication is not focused on the tax implications but, for example, entities might need to meet certain tax transfer pricing or corporate interest restriction rules. Any changes made for IBOR reform need to consider whether the new rate will still be seen as arm’s length (especially if any amendments are not solely required as a direct consequence of the reforms but made for other commercial reasons). If not, there could be implications for current or deferred tax balances.

The changes above all need to be factored into the overall strategy and project management process. Corporate treasurers should liaise with their tax specialists and other relevant counterparties.

Corporate treasurers are likely to be responsible for agreeing the changes to the relevant financial instruments. To simplify an entity’s or group’s banking arrangements, the corporate entity or bank might suggest aligning the terms of loan arrangements as part of the IBOR reform process.

Treasurers should be aware of the accounting implications of agreeing other commercially appropriate changes to the rate or to the instrument’s terms, such as a term extension or inclusion of a floor. These are unlikely to be ‘required as a direct consequence’, and so they could restrict the benefit obtained from the practical relief. Any other changes would still need to be assessed under IFRS 9 for derecognition or modification, and they could result in recognition of a gain or loss.

As noted above, there are various accepted methods for assessing the economically equivalent criterion. The markets will continue to develop for the new rates, and views of what is appropriate and what is a direct consequence might also evolve. We therefore recommend continuing to consult with advisers, especially on more complex arrangements.

For example, the replacement benchmark rate could be any reasonable alternative to the original IBOR rate for that change to be considered a ‘direct consequence’ of IBOR reform (for example, a move from GBP LIBOR to the Bank of England base rate would be considered a ‘direct consequence’ of IBOR reform, as would a move from GBP LIBOR to SONIA). Furthermore, the replacement benchmark rate does not need to have the same term as the original IBOR rate if there is insufficient liquidity in that term in the replacement benchmark rate. For example, for a 3-month IBOR contract, the replacement would not need to be a 3-month alternative benchmark rate to be a ‘direct consequence’ if that term is not available or not sufficiently liquid at the point of changing the contract. Conversely, moving to a 5-year alternative benchmark rate from a 3-month IBOR rate would not be expected to be a reasonable alternative if a liquid overnight alternative benchmark rate were also available (that is, it would not be viewed as a direct consequence of benchmark reform).

Treasurers should welcome the practical relief from updating the formal hedge designation as soon as the Phase 1 reliefs cease to apply.

However, the Phase 2 reliefs are only available once a change has been made to the hedge designation. Although entities have relief from updating their hedge documentation until the end of a reporting period, there is nothing to preclude earlier re-documentation and, in fact, this would help to evidence the changes that are made to hedge accounting for the relationship.

The decision whether or not to reset to zero might be driven by how an entity’s effectiveness testing is currently set up. However, we recommend that this relief is considered for all material hedge relationships.

If the cumulative testing result is close to the effectiveness threshold of 80–125% due to basis or timing differences, an entity might prefer to reset the relationship. However, if there is likely to be significant market volatility in the first period after transition to the new benchmark rate, the impact might be mitigated by a cumulative effectiveness calculation.

Treasurers should note that there is no exception from the recognition and measurement of hedge ineffectiveness, or the measurement of hedged items and hedging instruments. Therefore, previous sources of ineffectiveness could still create profit or loss volatility.

This exemption is helpful because corporate treasurers might want to hedge the benchmark rate component of existing and new debt instruments, but the new rates might not yet be separately identifiable.

However, many of the benchmark rates are expected to be separately identifiable in the next 24 months, and so fair value hedges of the benchmark component of fixed-rate debt, for example, should be possible if the entity adopts the Phase 2 IFRS 9 or IAS 39 amendments.

The amendments are applicable for periods beginning after 1 January 2021. Therefore, if an entity wants to designate a new benchmark rate as the hedged risk component in an earlier period, it will need to early adopt the Phase 2 amendments and disclose that fact in the financial statements.

The Basis of Conclusions on both IFRS 9 and IAS 39 describe various methods of ‘transitioning’ derivatives that fall into the reliefs, all of which retain the original hedging instrument in some form or other.

Many corporate entities might just use the ISDA fallback protocols, but others might plan to replace the original hedging instrument with a new instrument. This can be quicker and easier than negotiating changes to old terms, particularly if other changes to notional or terms are needed. However, even if no other changes are made, treasurers should be aware that, in some cases, this might mean that the original hedging arrangement is derecognised and the Phase 2 reliefs are not available.

The decision to enter into leases, and accounting for such leases, was not historically a key feature of a corporate treasurer’s role, but the decision to lease or borrow and buy has received more focus since the implementation of IFRS 16 led to many more on-balance sheet lease liabilities. Therefore, treasury departments are often part of the decision-making process, and they also help to compute the incremental borrowing rate using their understanding of the appropriate credit spread for secured and unsecured borrowings.

As noted above, many leases will need to be amended, and treasurers might be asked to support the negotiations to ensure that any rate change made by lessors or lessees is a direct consequence of the reform and that the revised payment is economically equivalent.