FASB permits new benchmark rate for hedge accounting

The change takes effect alongside an Accounting Standards Update.

FASB recently added to its list of permissible benchmark interest rates for hedge accounting.

FASB ASC Topic 815, Derivatives and Hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. One of those is interest rate risk, which is the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to the designated benchmark interest rate.

The list of permissible benchmark rates grew when FASB issued an Accounting Standards Update (ASU) permitting the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) for hedge accounting.

The SOFR is a broad Treasury repurchase agreement financing rate that a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified as its preferred alternative reference rate to the London Interbank Offered Rate (LIBOR).

Other permissible benchmark interest rates for hedge accounting are:

  • Interest rates on direct Treasury obligations of the U.S. government.
  • The LIBOR swap rate.
  • The OIS Rate based on the Fed Funds Effective Rate.
  • The Securities Industry and Financial Markets Association Municipal Swap Rate.

The change comes as many organizations are adopting ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which was issued in August 2017.

The new rules take effect concurrently with ASU No. 2017-12, which is effective:

  • For public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018.
  • For private companies for fiscal years beginning after Dec. 15, 2019, and interim periods beginning after Dec. 15, 2020.

For public companies that already have adopted ASU No. 2017-12, the new rules take effect for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. For all other companies and organizations that already have adopted ASU No. 2017-12, the new rules are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted in any interim period upon issuance of the new ASU if a company or organization already has adopted ASU No. 2017-12.

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