Benchmark interest rate reform: transition of financial instruments to alternative reference rates

When a contract referencing an interbank offered rate is amended to reference an alternative benchmark as a direct consequence of interest rate benchmark reform, a practical expedient allows the entity to update the effective interest rate prospectively rather than treating the change as a substantial modification that would otherwise trigger derecognition and an immediate gain or loss. The relief only applies where the change is required by reform and the new basis is economically equivalent to the old one, and related hedge accounting relationships need separate reassessment, so applying the expedient too broadly (or not reassessing hedges) can produce an inappropriate day-one gain/loss or an unnecessary hedge discontinuation.

Is the amendment required as a direct consequence of benchmark reform, and is the new basis economically equivalent to the previous basis immediately before the change? If both conditions are met, is the EIR being updated prospectively under the practical expedient without derecognition or an immediate modification gain or loss? For hedging relationships referencing the old benchmark, has the hedge documentation been updated for the new hedged risk/instrument without discontinuing the relationship, provided the reform-specific relief conditions continue to be met?

1. Confirm the amendment is required as a direct consequence of interest rate benchmark reform (not a general commercial renegotiation happening to coincide with reform).
2. Assess whether the new basis (alternative reference rate plus any credit spread adjustment) is economically equivalent to the previous basis immediately before the change.
3. If both conditions are met, apply the practical expedient: update the effective interest rate prospectively to reflect the new benchmark, without derecognizing the instrument and without recognizing an immediate modification gain or loss.
4. If the conditions are not met (e.g., the change is not economically equivalent, or other terms are renegotiated at the same time for unrelated commercial reasons), apply the normal IFRS 9 modification/derecognition assessment instead.
5. For hedging relationships referencing the old benchmark, update the hedge documentation for the new hedged risk/instrument without discontinuing the relationship, provided the reform-specific relief conditions continue to be met; reassess hedge effectiveness prospectively under the amended designation.

Recalculate the effective interest rate prospectively using the new benchmark rate and any agreed spread adjustment applied to the remaining cash flows, rather than recalculating the present value of remaining cash flows at the original EIR (which would otherwise generate a modification gain or loss). For hedge accounting, do not treat the reform-driven change in the hedged risk, hedging instrument, or designation as itself causing hedge ineffectiveness or failure of the hedge ratio requirements during the period the reform-specific reliefs apply; measure and disclose ineffectiveness arising from other, non-reform-related causes as usual.

Disclose: (1) the extent of the entity's remaining exposure to benchmark rates still subject to reform, by significant benchmark; (2) how the transition is being managed and its progress during the period; (3) the nature and extent of risks arising from the transition; (4) the effect of transitioning financial instruments and hedging relationships to alternative benchmark rates, including amounts to which the practical expedient was applied versus amounts treated as modifications; (5) any hedging relationships discontinued as a result of the transition and why.

• Applying the practical expedient automatically to every amendment referencing a new benchmark rate without verifying the change is a direct consequence of reform and economically equivalent to the old basis
• discontinuing hedge accounting unnecessarily upon a reform-related benchmark change that qualifies for relief, rather than simply updating the hedge documentation
• recognizing an inappropriate day-one modification gain or loss by recalculating cash flows at the original EIR instead of updating the EIR prospectively
• bundling unrelated commercial renegotiations into the same amendment and treating the entire change as reform-related without separating the two.