United States

Additional hedge accounting benchmark interest rate permitted

FINANCIAL REPORTING INSIGHTS  | 

Topic 815 of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification, “Derivatives and Hedging,” provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. Among those risks 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. In the United States, eligible benchmark interest rates under Topic 815 (as amended by Accounting Standards Update [ASU] 2017-12) are the:

  • Interest rates on direct U.S. Treasury obligations
  • Securities Industry and Financial Markets Association Municipal Swap Rate
  • Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate
  • London Interbank Offered Rate swap rate (LIBOR)

Because of concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified a broad Treasury repurchase agreement (repo) financing rate referred to as the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate. SOFR is a volume-weighted median spot interest rate that is calculated daily based on overnight transactions from the prior day’s trading activity in specified segments of the U.S. Treasury repo market.

On October 26, 2018, the FASB issued ASU 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, which added the OIS rate based on SOFR as a fifth U.S. benchmark interest rate permitted in the application of hedge accounting under Topic 815.

For entities that have not already adopted ASU 2017-12, ASU 2018-16 is required to be adopted concurrently with ASU 2017-12. For public business entities that already have adopted ASU 2017-12, ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted ASU 2017-12, ASU 2018-16 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period if an entity already has adopted ASU 2017-12. The amendments should be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.