FAQ 6.5 - Can IBOR reform have an impact on the fair value hierarchy level of a financial instrument?

IFRS 13 has different disclosure requirements depending on the classification and measurement category of the instrument.

EX 6.1 - IBOR reform Illustrative disclosures

These example disclosures illustrate the 'phase 1' and 'phase 2' amendments to IFRS 7. Supporting commentary is also provided. This publication is for illustrative purposes only and should be used in conjunction with the relevant financial reporting standards and any other reporting pronouncements and legislation applicable in specific jurisdictions.

In the Spotlight: A Corporate Treasury Focus on Phase 2 Amendments for Interest Rate Benchmark (IBOR) Reform

The IASB has issued further amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 that address issues arising during the reform of benchmark interest rates, including the replacement of one benchmark rate with an alternative one. The amendments are effective from 1 January 2021. In this Spotlight we focus on the implications for corporate entities (that is, non-financial institutions) and, in particular, their treasury function.

Frequently asked questions relating to the Phase 2 amendments

These illustrative examples demonstrate the practical application of the principles of this guidance.

One-off cash compensation on collateralised derivatives due to the transition from EONIA to €STR: PwC In brief INT2020-02

In connection with reforms to EONIA, the rate of interest paid on the collateral on certain Euro-denominated collateralised derivatives is expected to be reduced. The effect on the fair value of outstanding derivatives will be compensated for by a one-off cash compensation payment.

09 February 2021

FAQ 2.6 – Do the ISDA fallback amendments meet the ‘required by interest rate benchmark reform’ condition?

On 23 October 2020, the International Swaps and Derivatives Association (ISDA) published amendments to its 2006 ISDA Definitions for derivatives relating to fallback provisions for key Interbank Offered Rates (IBORs).

15 January 2021

EX 5.7.1 - Cash flow hedge example: Phase 1 reliefs and interaction with Phase 2

On 1 October 2015, entity A issued 10-year floating-rate debt of GBP10,000 on which the interest rate is 3-month GBP LIBOR + 1%. The debt is measured at amortised cost. At the same time as entering into the debt (1 October 2015), entity A entered into a 10-year interest rate swap (the ‘hedging instrument’) on which it pays a fixed rate of 3% and receives 3-month GBP LIBOR + 1%. Entity A simultaneously designated the swap in a cash flow hedge of the variability in cash flows of the debt, due to changes in 3-month GBP LIBOR (the ‘hedged item’). The entity performs prospective effectiveness testing at inception of the hedge and at each reporting date, using scenario analysis. All of the critical terms of the hedging instrument (that is, the interest rate swap) match those of the hedged debt at the inception of the hedge in 2015. Hence, under all scenarios, the hedge relationship is prospectively highly effective.

15 January 2021

EX 5.7.2 – Fair value hedge example: Phase 1 reliefs and interaction with Phase 2

On 1 October 2015, entity A issued 10-year fixed-rate debt of USD10,000 on which the interest rate is 3%. The debt is measured at amortised cost (adjusted for changes in fair value attributable to the hedged risk given the fair value hedge designation). At the same time as entering into the debt (1 October 2015), entity A entered into a 10-year interest rate swap (the ‘hedging instrument’) on which it pays 6-month USD LIBOR and receives a fixed rate (3%). Entity A simultaneously designated the swap in a fair value hedge of the change in fair value of the USD debt (issued in 2015) attributable to 6-month USD LIBOR interest rate movements. At inception of the hedge, given that USD LIBOR is a non-contractually specified risk component of the loan, entity A demonstrated that the risk component was separately identifiable and reliably measurable.

09 October 2020

FAQ 2.2 – What does ‘economically equivalent’ mean?

Question Several IBOR reliefs are conditional on the new basis for determining cash flows being ‘economically equivalent’ to the previous basis, or on the changes being ‘required by interest rate benchmark reform’ (which itself requires them to be ‘economically equivalent’ as set out in paragraph 5.4.7(b) of IFRS 9).

09 October 2020

FAQ 5.3.3 – Which alternative methods of transitioning derivatives will fall into the reliefs?

Question In many cases, IBOR-based derivatives designated in hedge accounting relationships will transition to alternative benchmark interest rates by modifying the referenced interest rate benchmark in the original derivative contract. This is referred to as ‘changing the basis for determining the contractual cash flows of the hedging instrument’ in paragraph 6.9.2 of IFRS 9 and paragraph 102Q of IAS 39.

08 October 2020

FAQ 2.1 – What does ‘necessary as a direct consequence of interest rate benchmark reform’ mean?

Question Several IBOR reliefs are conditional on changes to the basis for determining contractual cash flows being necessary as a ‘direct consequence’ of interest rate benchmark reform, or on the changes being ‘required by interest rate benchmark reform’ (which itself requires them to be a ‘direct consequence’ as set out in paragraph 5.4.7(a) of IFRS 9).