FASB Proposes ASU Expanding Topic 848 (Reference Rate Reform)

FASB Proposes an Accounting Standards Update Expanding Topic 848 (Reference Rate Reform)
Respondent comments are due Friday, November 13. 

Late last week, the Financial Accounting Standards Board (FASB) issued an exposure draft expanding the scope of Topic 848 to include derivatives that are discounted, but not reset, using rates subject to reference rate reform (RRR). The proposed amendments target contracts with calculations (other than resets) referencing IBOR rates, e.g. margining, discounting or price alignment.

The FASB noted:

“Stakeholders have raised questions about whether the guidance in Topic 848 can be applied to contracts that do not reference a rate that is expected to be discontinued but that are affected by reference rate reform as a result of the discounting transition.

Stakeholders have raised concerns about the need to reassess previous accounting determinations related to those contracts.

Stakeholders also have raised concerns about the hedge accounting consequences of the discounting transition.”

Based on these concerns, the FASB issued a proposal to amend the scope of Topic 848. The Board anticipates that the proposed scope refinements will result in financial reporting that reflects the economic substance of derivative instruments and transactions affected by IBOR related discounting. The Board is proposing that derivative discounting impacted by RRR, “should not cause entities to reassess previous accounting conclusions or result in the discontinuation of hedge accounting if those hedge relationships would otherwise continue to be highly effective.”

In addition to expanding qualifying derivative contracts under Topic 848, the exposure draft proposes the following:

  • ASC848 practical expedients are available for newly specified contract types
  • RRR relief for the newly specified contract types can be elected at different times from other derivative types
  • Addition or removal of one or more basis swaps to a hedge relationship subject to RRR does not require a de-designation
  • Continued application of short cut method/matched terms of effectiveness assessments in fair value and cash flow hedge relationships available when adding or removing basis swaps
  • Contracts affected by the discounting transition that are designated as a fair value hedge may adjust the cumulative fair value hedge basis adjustment upon adoption and continue to apply the shortcut method
  • Designated cash flow hedges affected by cash settlement changes related to discounting transitions can adjust AOCI for the change in value

Comments are due next Friday (the 13th!). There are four questions for respondents, including an invitation to identify other areas of RRR accounting concerns. We encourage organizations materially impacted by RRR to respond to the FASB’s request for feedback.

Below are the four questions from the exposure draft:

Question 1—Scope Refinement: Do you agree that the scope of Topic 848 should be refined to include contracts that do not reference a rate expected to be discontinued as a result of reference rate reform but that are affected by the discounting transition? Why or why not?

Question 2—Operability: The Board is proposing amendments in this Update to the expedients and exceptions in Topic 848 to capture the incremental consequences of the proposed scope refinement and tailor the existing guidance to derivative instruments affected by the discounting transition. Are those proposed amendments complete and operable? If not, what suggestions do you have and why?

Question 3—Effective Date and Transition: Do you agree with the proposed effective date and transition guidance? Why or why not?

Question 4—Ongoing Monitoring: Are there other accounting consequences related to reference rate reform that the Board should consider?

Based on the exposure draft: “An entity may elect to apply the amendments in this proposed Update retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued.”

Like other provisions of Topic 848, the amendments in the proposed update will expire for contract modifications, new hedge relationships and existing hedge relationships assessed for effectiveness after December 31, 2022.

Hedge Trackers, LLC along with Standard Chartered will be providing a webinar on November 10th at 9AM Pacific Time to discuss reference rate reform and what organizations need to do to address the coming market changes.

If you would like more information about RRR, please contact us.