United States

Additional hedge accounting benchmark interest rate proposed

FINANCIAL REPORTING INSIGHTS  | 

Topic 815 of the FASB’s 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 will be calculated daily on the basis of overnight transactions from the prior day’s trading activity in specified segments of the U.S. Treasury repo market.

On February 20, 2018, the FASB issued a proposed ASU, which, if finalized would add the OIS rate based on SOFR as a fifth U.S. benchmark interest rate permitted in the application of hedge accounting under Topic 815. The proposed ASU, Derivatives and Hedging (Topic 815): Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes, is available for comment until March 30, 2018.