FASB Issues Proposal to Clarify Scope of Reference Rate Reform Guidance

The FASB issues proposal clarifying the scope of reference rate reform guidance today. Stakeholders interested are to provide input on the proposed ASU by November 13, 2020.

Trillions of dollars in loans, derivatives, and other financial contracts reference the London Interbank Offered Rate (LIBOR). This is the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR, the FASB took on a project to help ease the potential accounting burden.

As a result of that project, in March 2020 the FASB issues ASU No. 2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Topic 848 provides temporary, optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

Since then, stakeholders are asking questions about 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. Stakeholders indicate that the modification, commonly referred to as the “discounting transition,” may have accounting implications. These stakeholders raise concerns about the need to reassess previous accounting determinations related to those contracts and about the hedge accounting consequences of the discounting transition.

The amendments in this proposed ASU clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition. Amendments in this proposed ASU to the expedients and exceptions in Topic 848 are included to capture the incremental consequences of the proposed scope refinement and to tailor the existing guidance to derivative instruments affected by the discounting transition.

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