FASB issued an Accounting Standards Update (ASU) that clarifies the scope of the guidance on reference rate reform (Topic 848). The Accounting Standards Update clarifies 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 Update 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 amendments in this Update became effective immediately for all entities.
FASB had issued, in March 2020, the guidance on reference rate reform, with the aim to ease the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks used for short-term loans. That guidance 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. The 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. In response to the stakeholder concerns about potential diversity in practice, FASB decided to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848.
Effective Date: January 07, 2021
Keywords: Americas, US, Banking, Securities, Reference Rate Reform, Interest Rate Benchmarks, Accounting Standards Update, LIBOR, Topic 848, Derivatives, FASB
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