FASB proposes scope clarification for reference rate relief

FASB issued a proposal Thursday that is intended to clarify the scope of the board’s guidance on reference rate reform.

In March, FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard was issued to address accounting challenges resulting from the sunsetting of the London Interbank Offered Rate (LIBOR) as well other benchmark interest rates banks use to make short-term loans to one another.

FASB ASC Topic 848 provides temporary, optional expedients and exceptions for using GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate that is expected to be discontinued.

Since the issuance of that standard, FASB has been asked whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but rather use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.

This modification, known as the “discounting transition,” may have accounting implications, and stakeholders are concerned about the need to reassess previous accounting determinations related to those contracts and about the hedge accounting consequences of the discounting transitions.

The proposal FASB issued Thursday would 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 the proposal to the expedients and exceptions in Topic 848 are designed to capture the incremental consequences of the proposed scope refinement and to tailor the existing guidance to derivative instruments affected by the discounting transition.

Comments can be submitted by Nov. 13 at FASB’s website.

— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.