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As awareness of benchmark reform has increased, so too has understanding of the various issues. And few of those issues stand to have as big an impact on corporate balance sheets as the accounting implications of a shift from interbank offered rates (IBORs) to alternative risk-free rates (RFRs).
The two main accounting bodies – the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) – are both aware of this issue and are looking to put in place solutions.
Last month, the IASB published an exposure draft looking at so-called phase-one issues – those that arise during the period of uncertainty before existing benchmarks are replaced with alternative RFRs. This is an important step forward, and ISDA welcomes the proposed relief from specific, forward-looking requirements that could have resulted in the discontinuation of hedge accounting solely due to the uncertainty arising from interest rate benchmark reform.
However, the IASB has yet to explore its ‘phase-two’ issues – those likely to arise upon the actual migration from IBORs to RFRs. These include, for example, whether firms can modify hedge accounting documentation to reflect the switch to an RFR without having to terminate their existing hedge accounting relationships.
This is a critical part of the puzzle, and is integral to how market participants prepare for benchmark reform. A lack of clarity could discourage firms from shifting to RFRs, hindering transition efforts.