What are the implications of ED 80 on the local environment?

The ASB will consider the implications of the proposals in ED 80 for the Standards of GRAP during the next Improvements project, in 2022/23. No changes are being made to Standards of GRAP as a result of ED 80, locally issued as ED 192.

Interest rate benchmark reform in South Africa

The Johannesburg Interbank Average Rate (JIBAR) is a widely used IBOR (Interbank offered rates) in South Africa. The Market Practitioners Group on Interest Rate Reforms in South Africa (MPG) is working on alternative reference rates that could be used in South Africa. Rates being considered would be designed similarly to overnight rates administered by the South African Reserve Bank (SARB) for secured and unsecured funding. The SARB and the MPG have indicated that JIBAR will cease to exist at some point. The roadmap outlining the end of JIBAR and adoption of alternative rates must still be communicated.

Local hedge accounting requirements

The Standards of GRAP do not contain specific requirements for hedge accounting. GRAP entities that choose to apply hedge accounting apply the requirements in IFRS Standards Therefore, these local entities would already have access to the exceptions provided in the IFRS Standards during the IBOR transition period.

Interest rate benchmark reform

What is the interest rate benchmark reform all about?

The Financial Stability Board (FSB) recommended replacing interest rate benchmarks, such as interbank offered rates (IBOR), with alternative, nearly risk-free rates. This is referred to as the interest rate benchmark reform. The reform is necessary because the financial crisis in 2008 showed fundamental weaknesses in the reliability and robustness of these benchmarks, exposing their vulnerability to manipulation. In many cases, these rates are reliant on judgement-based submissions rather than market transactions. The disruption to global financial markets from the COVID-19 pandemic  further highlighted the weaknesses in these benchmarks, and reinforced the importance of the FSB’s efforts to reform the production and use of these benchmarks.

Public authorities in many jurisdictions, such as the United States and the United Kingdom, have implementedthe reform. They have encouraged market participants to ensure they are ready for the reform by, for example, replacing interest rate benchmarks with alternative, nearly risk-free interest rates that are based on transaction data.

What are the implications of the reform on financial reporting?

Interest rate benchmarks are referenced directly in many financial instrument contracts, impacting on their initial and subsequent measurement. In addition, the measurement of many contracts that do not directly reference these rates could be impacted indirectly when entities refer to these rates to subsequently measure instruments. These benchmarks also impact certain prospective assessments that are required for hedge accounting.

Practically the reform means that entities must update instruments such as loan agreements and derivative contracts that directly refer to interest rate benchmarks. These should refer to new alternative nearly risk-free rates. Entities would need to find appropriate alternative reference rates to measure contracts where they are currently using inappropriate interest rate benchmarks. Entities affected by the reform face uncertainties during the period of transition. In many jurisdictions, authorities are still establishing appropriate alternative rates.

What amendments do ED 80 propose as a result because of the reform?

The IASB’s work on the interest rate benchmark reform has been executed in two phases: Pre-replacement and Replacement Issues, and mostly affect the IFRS Standards on financial instruments.

Pre-replacement issues: The first phase focused on guidance to entities before replacing an existing interest rate benchmark with an alternative benchmark rate.

Replacement issues: The second phase addressed issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative benchmark rate.

ED 80 proposes amendments to IPSAS that follow amendments made by the IASB to IFRS Standards in both phases:

• Pre-replacement issues:

These proposals provide temporary exceptions to some of the hedge accounting requirements, including prospective assessments such as whether a hedged forecast transaction is “highly probable” or whether a hedge is expected to remain effective; and assessing whether components of interest rate risk that are not specified in a contract are separately identifiable.

• Replacement issues:

These proposals assist stakeholders when changes are made to contractual cash flows or hedging relationships because of the reform by, for example, providing a practical expedient to not treat changes to contractual cash flows as a modification, and relief not to discontinue hedge accounting. The changes also require additional disclosure to provide useful information to users of financial statements.

Other narrow-scope amendments proposed

Other narrow-scope amendments made by the IASB that are proposed in ED 80 include:

• Classification of liabilities as current or non-current

The proposed amendments clarify a criterion in IPSAS 1 on Presentation of Financial Statements for classifying a liability as non-current, being: “the requirement for an entity to have the right to defer settlement of the liability for at least 12 months after the reporting period.”

• Assessing onerous contracts

Amendments are proposed to clarify the costs of fulfilling a contract that an entity includes when assessing whether a contract will be loss-making or onerous in IPSAS 19 on Provisions, Contingent Liabilities and Contingent Assets.

• Treatment of proceeds before intended use

Amendments are proposed to prohibit proceeds from the sale of items produced before that item of property, plant and equipment is available for use to be deducted from the cost of the item.

Improvements to IPSAS, 2021

The International Public Sector Accounting Standards Board (IPSASB) published an Exposure Draft on Improvements to IPSAS, 2021 (ED 80). The Accounting Standards Board (ASB) published this ED concurrently as ED 192.

ED 80 proposes minor amendments to International Public Sector Accounting Standards (IPSAS), categorised as:

• general improvements, which consist of proposals for minor amendments to IPSAS identified by stakeholders; and
• improvements to align with International Financial Reporting Standards (IFRS Standards), which consist of proposals for minor amendments to IPSAS sourced from recent IFRS improvements and narrow scope amendment projects of the International Accounting Standards Board (IASB).

The key changes that ED 80 proposes relate to changes to align with IFRS on the interest rate benchmark reform and other narrow-scope amendments made by the IASB.

Read more

Access the full Exposure Draft and educational materials by following this link.

Have your say

We are hosting roundtable discussions on 7 and 16 September 2021 and would like you to share your thoughts. To join these discussions, please contact Elizna van der Westhuizen at elizna@asb.co.za.

Written comment can be emailed to info@asb.co.za, by 20 September 2021.

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Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.

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