FASB clarifies scope of reference rate reform guidance
FINANCIAL REPORTING INSIGHTS |
Due to reference rate reform, the derivatives market is undergoing various transitions, including changes in the interest rate used for margining, discounting or contract price alignment for a derivative instrument (commonly referred to as “discounting transition”).
Topic 848, “Reference Rate Reform,” of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) provides optional expedients and exceptions for applying existing guidance to contract modifications, hedging relationships and other transactions that are expected to be affected by reference rate reform and meet certain scope guidance. Stakeholders recently have raised questions about whether ASC 848 also can be applied to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform even if those instruments do not reference a rate that is expected to be discontinued (a criterion that is required by the current scope of ASC 848).
The FASB recently issued Accounting Standards Update (ASU) 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.
In addition, to address another issue that is emerging related to reference rate reform, the ASU clarifies that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered eligible as a 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.
ASU 2021-01 became effective January 7, 2021. An entity may elect to apply the ASU on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available for issuance. If an entity elects to apply any of the amendments in the ASU for an eligible hedging relationship, any adjustments resulting from those elections must be reflected as of the date the entity applies the election. The amendments in the ASU do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022).