A two-pronged proposal by FASB, issued Wednesday, would extend the time financial statement preparers can use the reference rate reform relief guidance and expand the Secured Overnight Financing Rate-based (SOFR-based) interest rates available as benchmark interest rates.
The first issue in the proposal relates to a deferral of the proposed sunset date by two years of Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.
That March 2020 ASU was designed to give relief to financial statement preparers as they made the transition away from the London Interbank Offered Rates (LIBOR) and other rates that were being discontinued. LIBOR's phaseout was delayed, however, from a planned 2021 cessation date to June 30, 2023.
To ensure the relief in FASB ASC Topic 848 covers the period of time during which a significant number of modifications may take place, FASB said, the amendments in the proposed ASU would defer the sunset date of Topic 848 from Dec. 31, 2022, to Dec. 31, 2024, after which entities would no longer be permitted to apply the relief in Topic 848.
The second issue in the proposed ASU relates to the definition of the SOFR Overnight Index Swap (OIS) Rate.
In a 2018 update, FASB said that the definition of the SOFR Swap Rate was specific to the OIS rate based on SOFR and that it would monitor the developments of the forward-looking, term-based version of the SOFR rate (SOFR term) and consider including SOFR term as a benchmark interest rate in the future.
Based on the developments of SOFR term in the marketplace, FASB said in the Wednesday news release, the proposed ASU would amend the definition of the SOFR Swap Rate to include other versions of SOFR, such as SOFR term, as a benchmark interest rate under Accounting Standards Update No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.
FASB seeks feedback on the proposed ASU by June 6.
— To comment on this article or to suggest an idea for another article, contact Neil Amato at Neil.Amato@aicpa-cima.com.