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Announcement providing Temporary Exceptions to Hedge Accounting prescribed under Guidance Note on Accounting for Derivative Contracts due to Interest Rate Benchmark Reform
April, 01st 2021

Announcement providing Temporary Exceptions to Hedge Accounting
prescribed under Guidance Note on Accounting for Derivative Contracts

due to Interest Rate Benchmark Reform

Interest Rate Benchmark Reform such as Interbank Offered Rates (IBORs), e.g., LIBOR,
TIBOR, NIBOR, etc. play an important role in global financial markets and index
(benchmark) a variety of financial products including derivatives. Market developments have
undermined the reliability of some existing benchmarks. Consequently, some major interest
rate benchmarks will cease to be published across the globe after December 2021. The
ongoing reform in IBOR, will impact the way financial information is accounted for in the
financial statements.

With international developments taking place, global financial reporting Standards have been
amended to address the issues affecting financial reporting arising from these reforms. Two
groups of accounting issues that could affect financial reporting have been identified
globally:

• Phase 1- Pre-replacement issues—issues affecting financial reporting in the period during
which there is uncertainty about the timing or the amount of interest rate benchmark-based
cash flows. To address these issues, the amendments have been made to the relevant IFRS
Standards. In India, corresponding changes have been made under Ind AS that are effective
from April 1, 2020.

For the entities that do not apply Ind AS, the provisions regarding hedge accounting are
prescribed in the Guidance Note on Accounting for Derivative Contracts issued by the
Institute of Chartered Accountants of India in year 2015

This Announcement is issued in order to provide corresponding temporary relief to the
entities not following Ind AS having transactions in financial market products, for accounting
periods beginning on or after April 1, 2020.

• Phase 2- Replacement issues—issues affecting financial reporting when the uncertainty
regarding the timing and the amount of interest rate benchmark-based cash flows is resolved
and hedging relationships are affected as a result of the reform. IFRS Standards have been
amended to provide practical expedient for modifications of the financial contracts that are
affected by IBOR Reform with the view to avoid undue impact on the financial statements
where the transactions are economically equivalent to the previous basis (i.e., before and
after IBOR reforms). In absence of such practical expedient, due to change in benchmark
rate, there could be unintended consequences, such as discontinuation of hedge accounting,
etc.

In India, corresponding changes are being made under Ind AS to be effective from
accounting periods beginning on or after April 1, 2021. Corresponding amendments to
provide additional temporary exceptions to hedge accounting for entities not following Ind
AS are under formulation and will be issued in due course.

In the aforementioned background and to address the exigent issue, this Announcement
prescribes the temporary relief to the entities not following Ind AS corresponding to that
provided in Phase 1 to the entities following Ind AS.

1
Temporary exceptions from applying specific hedge accounting
requirements prescribed in Guidance Note on Accounting for Derivative
Contracts

1. An entity shall apply paragraphs 4–11 and paragraphs 13-14 to all hedging relationships
directly affected by interest rate benchmark reform. These paragraphs apply only to such
hedging relationships. A hedging relationship is directly affected by interest rate
benchmark reform only if the reform gives rise to uncertainties about:
(a) the interest rate benchmark designated as a hedged risk; and/or

(b) the timing or the amount of interest rate benchmark-based cash flows of the hedged
item or of the hedging instrument.

2. For the purpose of applying paragraphs 4–11, the term ‘interest rate benchmark reform’
refers to the market-wide reform of an interest rate benchmark, including the
replacement of an interest rate benchmark with an alternative benchmark rate such as
that resulting from the recommendations set out in the Financial Stability Board’s July
2014 report ‘Reforming Major Interest Rate Benchmarks’.1

3. Paragraphs 4–11 provide exceptions only to the requirements specified in these
paragraphs. An entity shall continue to apply all other hedge accounting requirements
prescribed in the Guidance Note for Accounting for Derivative Contracts for hedging
relationships directly affected by interest rate benchmark reform.

Highly probable requirement for cash flow hedges

4. For the purpose of determining whether a forecast transaction (or a component thereof) is
highly probable, an entity shall assume that the interest rate benchmark on which the
hedged cash flows are based is not altered as a result of interest rate benchmark reform.

Reclassifying the amount accumulated in the cash flow hedge reserve
5. For the purpose of applying the requirements in the Guidance Note in order to determine

whether the hedged future cash flows are probable to occur, an entity shall assume that
the interest rate benchmark on which the hedged cash flows are based is not altered as a
result of interest rate benchmark reform.

Assessing the economic relationship between the hedged item and the hedging
instrument

6. For the purpose of applying the requirements in paragraph 44(i) of the Guidance Note, an
entity shall assume that the interest rate benchmark on which the hedged cash flows
and/or the hedged risk are based, or the interest rate benchmark on which the cash flows
of the hedging instrument are based, is not altered as a result of interest rate benchmark
reform.

1 The report, 'Reforming Major Interest Rate Benchmarks', is available at http://www.fsb.org/wp-
content/uploads/r_140722.pdf. Also refer to Report of the Committee on Financial Benchmarks of RBI dated 7th Feb 2014
at https://m.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=761

2
Designating a component of an item as a hedged item
7. For a hedge of a non-contractually specified2 benchmark component of interest rate risk

if any, an entity shall apply the requirement that the risk component shall be separately
identifiable only at the inception of the hedging relationship.

End of application of temporary exceptions from applying specific hedge accounting
requirements
8. An entity shall prospectively cease applying paragraph 4 to a hedged item at the earlier

of:
(a) when the uncertainty arising from interest rate benchmark reform is no longer

present with respect to the timing and the amount of the interest rate benchmark-
based cash flows of the hedged item; and
(b) when the hedging relationship that the hedged item is part of is discontinued.

9. An entity shall prospectively cease applying paragraph 5 at the earlier of:
(a) when the uncertainty arising from interest rate benchmark reform is no longer
present with respect to the timing and the amount of the interest rate benchmark-
based future cash flows of the hedged item; and
(b) when the entire amount accumulated in the cash flow hedge reserve with respect to
that discontinued hedging relationship has been reclassified to profit or loss.

10. An entity shall prospectively cease applying paragraph 6:
(a) to a hedged item, when the uncertainty arising from interest rate benchmark reform
is no longer present with respect to the hedged risk or the timing and the amount of
the interest rate benchmark-based cash flows of the hedged item; and
(b) to a hedging instrument, when the uncertainty arising from interest rate benchmark
reform is no longer present with respect to the timing and the amount of the interest
rate benchmark-based cash flows of the hedging instrument.

If the hedging relationship that the hedged item and the hedging instrument are part of
is discontinued earlier than the date specified in paragraph 10(a) or the date specified in
paragraph 10(b), the entity shall prospectively cease applying paragraph 6 to that
hedging relationship at the date of discontinuation.

11. When designating a group of items as the hedged item, or a combination of financial
instruments as the hedging instrument, an entity shall prospectively cease applying
paragraphs 4–6 to an individual item or financial instrument in accordance with
paragraphs 8, 9, or 10, as relevant, when the uncertainty arising from interest rate
benchmark reform is no longer present with respect to the hedged risk and/or the timing
and the amount of the interest rate benchmark-based cash flows of that item or financial
instrument.

2 When risk components are designated as hedged items, an entity considers whether the risk components are explicitly
specified in a contract (contractually specified risk components) or whether they are implicit in the fair value or the cash
flows of an item of which they are a part (non-contractually specified risk components). A risk component to be eligible for
hedge designation should be separately identifiable and reliably measurable.

3
Disclosures -Uncertainty arising from interest rate benchmark reform
12. For hedging relationships to which an entity applies the exceptions set out in paragraphs

4–11, an entity shall disclose:
(a) the significant interest rate benchmarks to which the entity’s hedging relationships

are exposed;
(b) the extent of the risk exposure the entity manages that is directly affected by the

interest rate benchmark reform;
(c) how the entity is managing the process to transition to alternative benchmark rates;
(d) a description of significant assumptions or judgements the entity made in applying

these paragraphs (for example, assumptions or judgements about when the
uncertainty arising from interest rate benchmark reform is no longer present with
respect to the timing and the amount of the interest rate benchmark-based cash
flows); and
(e) the nominal amount of the hedging instruments in those hedging relationships.
Effective Date
13. An entity shall apply the temporary exceptions stated in paragraphs 1-12 and 14 for
annual periods beginning on or after 1st April 2020.
14. The requirements of this Announcement apply only to those hedging relationships that
existed at the beginning of the reporting period in which an entity first applies these
requirements or were designated thereafter, and to the amount accumulated in the cash
flow hedge reserve that existed at the beginning of the reporting period in which an
entity first applies these requirements.

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