FASB responds to reference rate reform

Reacting to the global markets’ planned shift away from using major interbank reference rates, including the London Interbank Offered Rate (LIBOR), the FASB recently issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to ease the burden of accounting for contract modifications related to reference rate reform. The amendments in ASU 2020-04 create a new Topic in the Codification, ASC 848, Reference Rate Reform, which contains guidance that is designed to simplify how entities account for contracts that are modified to replace LIBOR or other benchmark interest rates with new rates.

The amendments in ASU 2020-04 give qualifying entities the option to apply expedients and exceptions to contract modifications that are made until Dec. 31, 2022, if certain criteria are met. If adopted, these amendments and exceptions should be applied to all eligible modifications to contracts that are accounted for under an ASC Topic or industry Subtopic, except for hedging instruments. The optional expedients and exceptions for hedge accounting relationships designated under ASC 815 may be elected on a hedge-by-hedge basis.

The guidance in ASC 848 will not apply to any contract modifications made after Dec. 31, 2022 or to any hedging relationships entered into or evaluated after Dec 31, 2022, except for those hedging relationships existing as of Dec 31, 2022, for which certain expedients are applied and retained through the end of the hedging relationship.

Read more in New Developments Summary 2020-08, Reference rate reform: ASU 2020-04 simplifies accounting for transition from LIBOR and certain other reference rates.