Updates to our hedging guide for reference rate reform


Authored by RSM US LLP

Due to concerns about structural risks to interbank offered rates, regulators in various jurisdictions around the world have been working to replace LIBOR and other interbank offered rates with reference interest rates that are supported by transactions in liquid and observable markets. As a result of these efforts, LIBOR is anticipated to be discontinued as early as the end of 2021. The elimination of LIBOR and the expected elimination of other reference rates are referred to as reference rate reform. To ease the expected burden of reference rate reform on financial reporting, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which created Topic 848 in the FASB’s Accounting Standards Codification (ASC) to provide temporary optional expedients and exceptions to the guidance otherwise applicable to contract modifications, hedge accounting and other transactions.

We have updated our publication, A guide to hedge accounting upon the adoption of ASU 2017-12, to refer to the temporary optional expedients and exceptions included in ASC 848 that would allow entities to continue to apply hedge accounting to hedging relationships affected by reference rate reform, provided certain criteria are met. The following is a partial list of the activities that may be involved in replacing a reference rate in a hedging relationship, and (or) the accounting for that replacement, for which ASC 848 provides temporary optional expedients and exceptions:

  • Updating formal hedge documentation
  • Amending the critical terms of a hedging relationship, such as making changes to the contractual terms of the hedging instrument, hedged item or forecasted transaction, or the designated method of assessing the effectiveness of a cash flow hedge
  • Changing the designated benchmark rate in a fair value hedge
  • Applying the shortcut method to existing fair value hedges
  • Assessing the probability of the hedged forecasted transaction in a cash flow hedge
  • Changing the designated hedged risk in a cash flow hedge
  • Assessing the effectiveness of a cash flow hedge (both initially and subsequently), including the shortcut method and simplified approach for certain private companies

All of these temporary optional expedients and exceptions, as well as other expedients and exceptions not related to hedging relationships, are discussed in detail in our white paper, Optional accounting expedients can make LIBOR transition easier.