In March 2020, the FASB issued ASU 2020-04 – Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The intent of this ASU was to ease the potential accounting burden of the expected move of global capital markets away from LIBOR (or another reference rate that is expected to be discontinued) due to reference rate reform.
In response to stakeholder concerns related to ASU 2020-04, the FASB has issued an Exposure Draft that provides the following optional expedients that reduce costs and complexity of implementation:
- Simplified accounting analysis for contract modifications
- Allow hedging relationships to continue with designations if there are qualifying changes in the critical terms of an existing hedging relationship due to reference rate reform
- Allow a change in the systematic and rational method used to recognize in earnings the components excluded from the assessment of hedge effectiveness
- Allow a change in the designated benchmark interest rate to a different eligible benchmark interest rate in a fair value hedging relationship
- Allow the shortcut method for a fair value hedging relationship to continue for the remainder of the hedging relationship
- Simplify the assessment of hedge effectiveness and provide temporary optional expedients for cash flow hedging relationships affected by reference rate reform
- Allow a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and are classified as held to maturity before January 1, 2020
The amendments in the Exposure Draft would be effective upon issuance of the ASU. An entity may elect to apply the amendments in the Exposure Draft retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final ASU, up to the date that financial statements are available to be issued. The amendments in this Exposure Draft would not apply after December 31, 2022 for the expedients noted other than in limited instances.
The full text of the Exposure Draft is available here.
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