United States

Proposal to clarify 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 a proposed Accounting Standards Update (ASU), which, if finalized, would clarify that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition. The proposed ASU, Reference Rate Reform (Topic 848): Scope Refinement, is available for comment until November 13, 2020.

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