Second Phase of Interest Rate Benchmark Reform

Changing Interest Rates Needs Amendments to Financial Reporting Standards

As banks worldwide are consistently changing their interest rate benchmark, financial reporting standards are affected as well. As such, the second phase of interest rate benchmark reform amendments will take effect accordingly. The implementation of this shall take effect for financial reporting beginning in January 2021.

The Affected MFRS

The amendments are affecting several MFRSs such as MFRS 9 Financial Instruments, MFRS 139 Financial Instruments: Recognition and Measurement, MFRS 7 Financial Instruments: Disclosures, MFRS 4 Insurance Contracts, and MFRS 16 Leases. Most of these amendments are in tandem with the current conditions of financial reporting standards, including reforms of interest rate benchmark.

MFRS 9 Financial Instruments

As with financial assets or liability based on an interest rate benchmark, the contractual cash flow of either the asset or liability may need to change. The changes are necessary when it directly results from interest rate benchmark reform and if the new basis for determining the contractual cash flow is equivalent to the previous base. For example, a new foundation would be when it is replaced by an alternative interest rate benchmark, or the method of calculating the interest rate benchmark is different.

MFRS 139 Financial Instruments: Recognition and Measurement

Within this specific segment, the amendments provide for hedge accounting requirements. In the second phase of interest rate benchmark reform, hedged items or instruments may change. Thus, entities must amend the hedging relationship designation to reflect the modifications. Nevertheless, such modification is not the discontinuation of the current hedging relationship. It should also be understood that it is not a new hedging relationship.

MFRS 7 Financial Instruments: Disclosure

The amendment also advises for applicable entities to disclose matters of the revisions to ensure users understand what is going on. Among the information relevant to the amendment are the extent and nature of the entity’s risks and the necessary risk management details. The entity’s progress and management in completing the change to different benchmark rates.

MFRS 4 Insurance Contracts and MFRS 16 Leases

Both of these segments will apply specific amendments as in MFRS 9 when the conditions are met. The requirements for Insurance Contracts are the basis to determine the contractual cash flows of the financial asset or liability changes due to interest rate benchmark reform. The interest rate benchmark term here refers to market-wide interest rate benchmark reform instead of specific interest rate benchmark reform. As for Leases, the amendments occur when determining future lease payments based on the interest rate benchmark. When the interest rate benchmark reform causes immediate changes, the amendments are a must. Another condition will be the new basis to determine the upcoming lease payments is economically similar to the previous base.

Practical Expedient

These amendments are to provide practical expedients to companies when they need to produce their respective financial reports. With the interest rates going through reforms as required by the world economy, financial reporting standards will need to reflect necessary changes. For some companies that may have difficulties understanding the essential modifications, our team of experts is ready to help.