Overview

Accounting Standard AASB 2019-3, enacted in October 2019, addresses the problem of uncertainty in financial reporting arising from the reform of interest rate benchmarks. This reform was necessitated by the International Accounting Standards Board's (IASB) issuance of International Financial Reporting Standard Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) in September 2019. The Australian Accounting Standards Board (AASB) amended Australian Accounting Standards AASB 7, AASB 9, and AASB 139 to modify certain hedge accounting requirements, providing relief from the potential effects of the benchmark reform, and to require additional disclosures concerning hedging relationships affected by these uncertainties. The AASB, operating under the authority conferred by the Corporations Act 2001, finalised AASB 2019-3 following consultation with stakeholders, including Australian banks and accounting firms, and in accordance with the proposals made by the IASB. The amendments are applicable to annual reporting periods beginning on or after 1 January 2020, with earlier application permitted.

Scope and Application

Accounting Standard AASB 2019-3, Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform, applies to entities that must comply with Australian Accounting Standards, including companies listed on the Australian Securities Exchange, large proprietary companies, and other entities that choose to comply with the standards for the preparation of financial reports. The amendments made by AASB 2019-3 are necessary due to the International Financial Reporting Standard Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) issued by the International Accounting Standards Board in September 2019, and they primarily affect entities that hold financial instruments subject to interest rate benchmarks undergoing reform. The amendments apply to annual reporting periods beginning on or after 1 January 2020, with earlier application permitted. The AASB has the power to make these amendments under subsection 33(3) of the Acts Interpretation Act 1901, as the Australian Accounting Standards Board (AASB) is empowered to amend the Accounting Standards that are legislative instruments under the Corporations Act 2001. The amendments to AASB 7, AASB 9 and AASB 139 are designed to provide relief from the potential effects of the uncertainty caused by the interest rate benchmark reform and require entities to provide additional information about their hedging relationships affected by these uncertainties. The AASB considered the feedback from stakeholders, including Australian banks and accounting firms, which broadly supported the proposed amendments. The AASB has confirmed that the amendments made do not have a substantial direct or indirect impact on business or competition, and thus a Regulation Impact Statement has not been prepared in connection with the issue of AASB 2019-3.

Key Provisions

The primary operative sections of AASB 2019-3 are sections that amend Australian Accounting Standards AASB 7, AASB 9 and AASB 139. These amendments (sections 3 and 4) modify certain hedge accounting requirements and require entities to disclose additional information about their hedging relationships that are directly affected by interest rate benchmark reform. These changes aim to alleviate potential uncertainties arising from the reform. The Standard applies to annual reporting periods beginning on or after 1 January 2020, although earlier application is permitted (section 6). The AASB 2019-3 imposes several obligations on entities subject to the Australian Accounting Standards. Firstly, entities must ensure that their hedge accounting practices are in line with the amended standards, particularly those modifications designed to address uncertainties arising from interest rate benchmark reform. Secondly, entities are required to provide additional disclosures about their hedging relationships that are directly impacted by these uncertainties. This includes disclosing the nature of the hedging relationships, the hedged items, the hedging instruments, and the reasons for any changes in the hedge accounting designation (section 4). Violations of AASB 2019-3 may not directly incur specific criminal or civil penalties under the Accounting Standards themselves. However, entities that fail to comply with the amended standards may face consequences under the Corporations Act 2001. For instance, failure to comply with accounting standards can lead to misleading or deceptive conduct, potentially resulting in civil penalty orders of up to $2.25 million for companies and $450,000 for individuals, as well as criminal penalties (section 1311). Additionally, directors and officers of entities that do not comply may be personally liable for penalties. The amendments in AASB 2019-3 are intended to ensure that financial reporting remains transparent and reliable, and non-compliance could undermine this objective.