ST Engineering Annual Report 2020

NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2020 (CURRENCY – SINGAPORE DOLLARS UNLESS OTHERWISE STATED) C16 Derivative financial instruments (continued) Estimate and judgement: Interest rate benchmark reform Following the global financial crisis, the reform and replacement of benchmark interest rates such as USD LIBOR and other inter-bank offered rates (IBORs) has become a priority for global regulators. There is currently uncertainty around the timing and precise nature of these changes. To transition existing contracts and agreements that reference LIBOR to Secured Overnight Financing Rate (SOFR), adjustments for term differences and credit differences might need to be applied to SOFR, to enable the two benchmark rates to be economically equivalent on transition. The Group’s treasury function is managing the Group’s LIBOR transition plan. The greatest change will be amendments to the contractual terms of the LIBOR-referenced interest rate swap and the corresponding update of the hedge designation. Relief applied The Group has applied the following reliefs that were introduced by the amendments made to SFRS(I) 9 Financial Instruments: • When considering the ‘highly probable’ requirement, the Group has assumed that the variable interest rate on which the Group’s hedged debt is based does not change as a result of IBOR reform; • In assessing whether the hedge is expected to be highly effective on a forward-looking basis the Group has assumed that the variable interest rate on which the cash flows of the hedged debt and the interest rate swap that hedges it are based is not altered by the IBOR reform; and • The Group has not recycled the cash flow hedge reserve relating to the period after the reforms are expected to take effect. Assumptions made In calculating the change in fair value attributable to the hedged risk of floating-rate debt, the Group has made the following assumptions that no changes to the terms of the floating rate debt are anticipated to reflect its current expectations. / ST ENG I NEER I NG 228