Following the recommendations from the Financial Stability Board’s report -- “Reforming Major Interest Rate Benchmarks,” many jurisdictions, including Canada, are replacing existing InterBank Offered Rates (IBOR) benchmarks with alternative benchmark rates.
The current guidance in Section 3856, Financial Instruments requires enterprises to perform a “10 percent” test to quantitatively assess whether a modification to a debt contract should be accounted for as an extinguishment. This can be onerous for private enterprises with a high volume of debt contracts that refer to IBOR benchmark rates. In addition, a change in the benchmark rate in derivative contracts that are designated in a hedging relationship will lead to the discontinuation of hedge accounting. This outcome may not provide decision-useful information to financial statement users.
The AcSB decided to amend Section 3856 to:
- simplify the current accounting analysis for debt modifications; and
- allow hedging relationships to continue upon a change in certain critical terms that are related to IBOR reform.