FASB responds to reference rate reform

In March 2020, reacting to the global markets’ planned shift away from using major interbank reference rates, including the London Interbank Offered Rate (LIBOR), the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): 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 created a new Topic in the Codification, ASC 848, Reference Rate Reform, which contains guidance designed to simplify how entities account for contracts that are modified to replace existing LIBOR or other benchmark interest rates with new rates.

In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify that amendments to derivatives that change interest rates used for discounting, margining, and contract price alignment due to reference rate reform are within the scope of ASC 848.

In December 2022, the FASB also issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024.

The guidance in ASC 848 gives qualifying entities the option to apply expedients and exceptions to contract modifications that are made until Dec. 31, 2024 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.

Read more in Grant Thornton’s New Developments Summary 2020-08, "Reference rate reform: ASUs simplify accounting for transition from LIBOR and certain other reference rates."