FASB proposes adding a new benchmark interest rate for hedge accounting

By Ken Tysiac

FASB issued a proposal Tuesday that would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting.

Currently, eligible benchmark interest rates for hedge accounting under FASB Accounting Standards Codification Topic 815, Derivatives and Hedging, are:

  • Treasury obligations of the U.S. government (UST).
  • The London Interbank Offered Rate (LIBOR) swap rate.
  • The Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate.
  • The Securities Industry Financial Markets Association (SIFMA) Municipal Swap Rate.

The proposal would add a fifth benchmark interest rate to help companies and other organizations avoid the potential cost and complexity associated with using different cash flows and discount rates to measure the hedged item and the hedging instrument.

This fifth benchmark rate would be the OIS rate based on the Secured Overnight Financing Rate (SOFR).

The SOFR is a broad Treasury repurchase agreement (repo) financing rate. This preferred alternative reference rate was identified by a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York because of concerns about the sustainability of LIBOR.

Comments on the proposal can be submitted by March 30 through FASB’s website.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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