FASB Clarifies Scope of Recent Reference Rate Reform Guidance
Norwalk, CT, January 7, 2021—The Financial Accounting Standards Board (FASB) today issued an Accounting Standards Update (ASU) that clarifies the scope of the FASB’s recent reference rate reform guidance.
In March 2020, the FASB issued guidance aimed at easing the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks use to make short-term loans to each other. That guidance, known as Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provided temporary, optional expedients and exceptions for applying accounting guidance to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.
Some stakeholders have questioned whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. These stakeholders indicated that the modification, commonly referred to as the “discounting transition,” may have accounting implications, and raised concerns about the potential need to reassess previous accounting determinations related to those derivatives and about the possible hedge accounting consequences of the discounting transition.
The amendments in the new ASU clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.
The ASU is available at www.fasb.org.