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Both the US GAAP guidance and IFRS amendments allow for contracts that are modified as a direct result of reference rate reform to qualify for the relief offered by the amendments, though there are certain differences in how qualifying contracts are determined and how to treat contemporaneous changes. It is expected, however, that the scope of contract modifications and hedge accounting relationships that qualify for the relief would be similar under US GAAP and IFRS. Both frameworks also allow for the addition of contract fallback language to qualify for the relief.
There may be additional considerations when applying the amendments under IFRS that do not need to be considered when applying US GAAP, such as the “economically equivalent” requirement discussed below.
US GAAP
IFRS
In order to qualify for the contract modification relief under ASC 848, modifications to terms must directly replace or have the potential to replace a reference rate that is expected to be discontinued with another interest rate index. If modifications are made that change or have the potential to change the amount or timing of contractual cash flows that are unrelated to the replacement of the reference rate, the guidance in ASC 848 cannot be applied even if such modifications are made contemporaneous with amendments related to reference rate reform.
ASC 848 provides a list of specific terms that can be modified that would be considered to be directly related to reference rate reform. It also lists changes that would be considered unrelated to reference rate reform.
Under the IFRS amendments, changes in the basis for determining contractual cash flows as a result of interest rate benchmark reform are eligible for the practical expedient only to the extent that the changes are necessary as a direct consequence of interest rate benchmark reform, and the new basis is economically equivalent to the previous basis.
Under IFRS, if there are changes in addition to those required by IBOR reform made to financial assets or financial liabilities, an entity will generally first apply the practical expedient to the economically equivalent amendments and then apply other applicable IFRS to the additional changes to which the practical expedient does not apply.
However, this two-step accounting does not apply when lease modifications are made by lessees in addition to those required by IBOR reform. In such cases, an entity will be required to apply applicable IFRS 16 requirements to account for all lease modifications made at the same time, including those required by IBOR reform.
Under US GAAP, all entities would be disqualified from applying the reference rate reform practical expedients if a contemporaneous change unrelated to reference rate reform is made.
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