ED/ Ind AS 109 & 107/ 2019/11

Exposure Draft

Interest Rate Benchmark Reform

Amendments to Ind AS 109 and Ind AS 107

(Last date for the comments: November 8, 2019)

Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India

Exposure Draft

Interest Rate Benchmark Reform (Amendments to Ind AS 109 and Ind AS 107)

Following is the Exposure Draft of Interest Rate Benchmark Reform (Amendments to Ind AS 109 and Ind AS 107), issued by the Accounting Standards Board (the Board) of the Institute of Chartered Accountants of India, for comments.

The Board invites comments on any aspect of this Exposure Draft. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.

How to Comment

Comments should be submitted using one of the following methods, so as to receive not later than November 8, 2019:

1. Electronically: Click on the below mentioned option to submit a comment letter or visit at the following link (Preferred method):
http://www.icai.org/comments/asb/
2. Email: Comments can be sent at commentsasb@icai.in
3. Postal: Secretary, Accounting Standards Board,
The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi – 110 002

Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to asb@icai.in.

Amendments to Ind AS 109, Financial Instruments

Paragraphs 6.8.1–6.8.12 and 7.1.8 are added. A new heading is added before paragraph 6.8.1.

New subheadings are added before paragraphs 6.8.4, 6.8.5, 6.8.6, 6.8.7 and 6.8.9.

Paragraph 7.2.26 is amended. New text in this paragraph is underlined.

Chapter 6 Hedge accounting

6.8 Temporary exceptions from applying specific hedge accounting requirements

6.8.1 An entity shall apply paragraphs 6.8.4–6.8.12 and paragraphs 7.1.8 and 7.2.26(d) to all  hedging relationships directly affected by interest rate benchmark reform. These  paragraphs apply only to such hedging relationships. A hedging relationship is directly affected by interest rate benchmark reform only if the reform gives rise to uncertainties  about:

(a) the interest rate benchmark (contractually or non-contractually specified) designated as a hedged risk; and/or

(b) the timing or the amount of interest rate benchmark-based cash flows of the hedged item or of the hedging instrument.

6.8.2 For the purpose of applying paragraphs 6.8.4–6.8.12, the term ‘interest rate benchmark reform’ refers to the market-wide reform of an interest rate benchmark, including the replacement of an interest rate benchmark with an alternative benchmark rate such as that resulting from the recommendations set out in the Financial Stability Board’s July 2014  report ‘Reforming Major Interest Rate Benchmarks’.1

6.8.3 Paragraphs 6.8.4–6.8.12 provide exceptions only to the requirements specified in these paragraphs. An entity shall continue to apply all other hedge accounting requirements to hedging relationships directly affected by interest rate benchmark reform.

Highly probable requirement for cash flow hedges

6.8.4 For the purpose of determining whether a forecast transaction (or a component thereof) is  highly probable as required by paragraph 6.3.3, an entity shall assume that the interest  rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform.

Reclassifying the amount accumulated in the cash flow hedge reserve

6.8.5 For the purpose of applying the requirement in paragraph 6.5.12 in order to determine whether the hedged future cash flows are expected to occur, an entity shall assume that the interest rate benchmark on which the hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform.

Assessing the economic relationship between the hedged item and the hedging instrument

6.8.6 For the purpose of applying the requirements in paragraphs 6.4.1(c)(i) and B6.4.4B6.4.6, an entity shall assume that the interest rate benchmark on which the hedged cash flows  and/or the hedged risk (contractually or non-contractually specified) are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, is not altered as a result of interest rate benchmark reform.

Designating a component of an item as a hedged item

6.8.7 Unless paragraph 6.8.8 applies, for a hedge of a non-contractually specified benchmark component of interest rate risk, an entity shall apply the requirement in paragraphs  6.3.7(a) and B6.3.8that the risk component shall be separately identifiableonly at the inception of the hedging relationship.

6.8.8 When an entity, consistent with its hedge documentation, frequently resets (i.e.  discontinues and restarts) a hedging relationship because both the hedging instrument and the hedged item frequently change (ie the entity uses a dynamic process in which both the hedged items and the hedging instruments used to manage that exposure do not remain the same for long), the entity shall apply the requirement in paragraphs 6.3.7(a) and B6.3.8that the risk component is separately identifiableonly when it initially designates a hedged item in that hedging relationship. A hedged item that has been assessed at the time of its initial designation in the hedging relationship, whether it was at the time of the hedge inception or subsequently, is not reassessed at any subsequent redesignation in the same hedging relationship.

End of application

6.8.9 An entity shall prospectively cease applying paragraph 6.8.4 to a hedged item at the earlier of:

(a) when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows of the hedged item; and

(b) when the hedging relationship that the hedged item is part of is discontinued.

6.8.10 An entity shall prospectively cease applying paragraph 6.8.5 at the earlier of:

(a) when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based future cash flows of the hedged item; and

(b) when the entire amount accumulated in the cash flow hedge reserve with respect to that discontinued hedging relationship has been reclassified to profit or loss.

6.8.11 An entity shall prospectively cease applying paragraph 6.8.6:

(a) to a hedged item, when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the hedged risk or the timing and the amount of the interest rate benchmark-based cash flows of the hedged item; and

(b) to a hedging instrument, when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows of the hedging instrument.

If the hedging relationship that the hedged item and the hedging instrument are part of is discontinued earlier than the date specified in paragraph 6.8.11(a) or the date specified in paragraph 6.8.11(b), the entity shall prospectively cease applying paragraph 6.8.6 to that hedging relationship at the date of discontinuation.

6.8.12 When designating a group of items as the hedged item, or a combination of financial instruments as the hedging instrument, an entity shall prospectively cease applying paragraphs 6.8.4–6.8.6 to an individual item or financial instrument in accordance with paragraphs 6.8.9, 6.8.10, or 6.8.11, as relevant, when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the hedged risk and/or the timing and the amount of the interest rate benchmark-based cash flows of that item or financial instrument.

Chapter 7 Effective date and transition

7.1 Effective date

7.1.8 Interest Rate Benchmark Reform (amendments to Ind AS 109 and Ind AS 107) added Section 6.8 and amended paragraph 7.2.26. An entity shall apply these amendments for annual periods beginning on or after 1 April, 2020.

7.2 Transition

Transition for hedge accounting (Chapter 6)

7.2.26 As an exception to prospective application of the hedge accounting requirements of this  Standard, an entity:

(a)-(c) Omitted

(d) shall apply the requirements in Section 6.8 retrospectively. This retrospective application applies only to those hedging relationships that existed at the beginning of the reporting period in which an entity first applies those requirements or were  designated thereafter, and to the amount accumulated in the cash flow hedge reserve that existed at the beginning of the reporting period in which an entity first applies those requirements.

Appendix 1

Comparison with IFRS 9, Financial Instruments, IFRIC 16 and IFRIC 19

4. Following paragraphs related to transition have not been included as these paragraphs are not relevant in Indian context. However, in order to maintain consistency with paragraph numbers of IFRS 9, the paragraph numbers are retained in Ind AS 109.

  • Paragraph 7.2.2
  • Paragraphs 7.2.6-7.2.7
  • Paragraphs 7.2.12-7.2.13
  • Paragraphs 7.2.14A-7.2.258
  • Paragraphs 7.2.6(a)-(c)
  • Paragraphs 7.2.27-7.2.28

Amendments to Ind AS 107, Financial Instruments: Disclosures

Paragraphs 24H and 44DE–44DF are added and a subheading is added before paragraph 24H.

Hedge accounting

Uncertainty arising from interest rate benchmark reform

24H For hedging relationships to which an entity applies the exceptions set out in paragraphs  6.8.4–6.8.12 of Ind AS 109, an entity shall disclose:

(a) the significant interest rate benchmarks to which the entity’s hedging relationships are exposed;

(b) the extent of the risk exposure the entity manages that is directly affected by the interest rate benchmark reform;

(c) how the entity is managing the process to transition to alternative benchmark rates;

(d) a description of significant assumptions or judgements the entity made in applying these paragraphs (for example, assumptions or judgements about when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows); and

(e) the nominal amount of the hedging instruments in those hedging relationships.

Effective date and transition

44DE Interest Rate Benchmark Reform (amendments to Ind AS 109 and Ind AS 107) added paragraphs 24H and 44DF. An entity shall apply these amendments when it applies the  amendments to Ind AS 109.

44DF In the reporting period in which an entity first applies Interest Rate Benchmark Reform, an entity is not required to present the quantitative information required by paragraph 28(f) of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Note:-

1 The report, ‘Reforming Major Interest Rate Benchmarks’, is available at http://www.fsb.org/wpcontent/ uploads/r_140722.pdf.

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