FASB clarifies scope of reference rate relief

By Ken Tysiac

FASB issued guidance Thursday that is designed to clarify which derivatives are eligible for certain optional expedients and exceptions under the board’s new standard that creates accounting relief for reference rate reforms.

The London Interbank Offered Rate (LIBOR) and other interbank offered rates have been widely used as benchmarks or reference rates in loans, derivatives, and other financial contracts. But with LIBOR and other similar rates being discontinued this year, new benchmarks will be used in the future.

In March 2020, FASB issued a standard that is designed to give financial statement preparers relief as they make the transition away from interbank offered rates. The guidance is contained in FASB ASC Topic 848, Reference Rate Reform.

Changes in the interest rates used for margining, discounting, or contract-price alignment for derivative instruments are being implemented as part of the marketwide transition to new reference rates, which is known as the “discounting transition.”

According to FASB, the discounting transition affects derivative instruments that are indexed to a wide variety of reference rates, including rates that will not be discontinued as a result of reference rate reform. In the standard issued Thursday, FASB clarified the scope of Topic 848 to explain that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848.

In addition, FASB clarified that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of reference rate reform.

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

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