Exposure Draft issued for Interest Rate Benchmark Reform-Phase 2: ICAI

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Exposure Draft Issued for Interest Rate Benchmark Reform-Phase 2: ICAI

Rate Benchmark Reform-Phase 2: ICAI

The Institute of Chartered Accountants of India (ICAI)  announced that the institute has issued an exposure draft on the Phase 2 of the Interest Rate Benchmark Reform which contains the proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4, IFRS 16 among others. 

The International Accounting Standards Board (IASB) had set a project to its work plan that can ascertain the implication of the reform. The new project found out that two types of accounting issues could affect the financial reporting:

Pre-Replacement Issues

It includes the issues that can affect the financial reporting when there is any kind of trouble in the contractual cash flow that may arise due to the reform. Such issues were targeted in the first phase of the Interest Rate Benchmark Reform. 

Replacement Issues

It includes the issues that can affect the financial reporting when deliberate changes to the contractual cash flow and to avoid the relationships that may arise due to the reform. These issues will be targeted and addressed in the second phase of the Interest Rate Benchmark Reform. 

The pre-replacement issues were targeted in the first phase as the IASB considered that they were more important to solve and hence, the first phase was started by the board in September 2019. 

Now that the second phase is near, an Exposure Draft is being issued by the IASB for the phase two of the Interest Rate Benchmark Reform, which will be targeting the replacement issues, as described above, that might surface due to the Interest Rate Benchmark Reform which can create a barrier in the contractual cash flows and halting the relationship.

The board had introduced the amendments in the specific areas of  IFRS 9 which governs the provisions related to the Financial Instruments, IAS 39 which governs the provisions related to the Recognition and Measurement, IFRS 7 which governs the provisions related to the Disclosures, IFRS 4 which governs the provisions related to the Insurance Contracts and IFRS 16 which governs the provisions related to the Lease and all the related amendments and changes will be introduced accordingly. 

The target of the second phase will be the financial instruments and hedging relationships. The board expects that the amendments will help in bringing information related to the effects of the Interest Rate Benchmark Reform on the financial instruments. The board said that these amendments and information will prove to be very useful for the investors as well as the companies. The board also said that these amendments will help in assisting the companies in every way possible.

Read Also: ICAI launches Three Virtual Courses to provide Learning Online

The proposed amendments will be related to:

#1. Modifications in the Financial Assets and Liabilities and the Leases

According to the amendments, all the companies will not be able to adjust the amount related to any financial instruments for the purpose of compliance of the Interest Rate Benchmark. The company will have to introduce and act on the updated interest rate to reflect any change in the Interest Rate Benchmark.

#2. Hedge Accounting

The companies are prohibited from freezing their hedge accounting system in order to comply with the Interest Rate Benchmark that changes the hedge according to other criteria of hedging.

#3. Disclosures

It is mandatory for the companies to disclose all the information related to the new risks that might appear due to the Interest Rate Benchmark. The company is also required to state the course of action required to manage the transition to the alternative interest rate benchmarks. 

The board has assured that they will be considering all the suggestions related to the Exposure Draft to develop a promising draft according to the standards of the Interest Rate Benchmark Reform. The board has opened the line for suggestions in the exposure draft till 25th May 2020. The board is expected to issue the final draft by the third quarter of 2020.

The  Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) invites the comments if the public to the Exposure Draft of the IASB with a motive to allow the stakeholders, who have been raising some concerns about the International Standards setting. The ASB is set to hear all the comments of the stakeholders and the rest of the people.

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