Effects of reference rate reform on financial reporting

By Jeffrey A. Ford, Grossman Yanak & Ford LLP

Global market participants are transitioning from using or referencing the LIBOR and similar interbank offered rates to alternative reference rates. In response, in the United States, the FASB issued ASUs 2020-04 and 2021-01 to provide optional expedients and exceptions for affected contract modifications, hedge accounting, and held-to-maturity (HTM) debt securities. A high-level summary of the optional expedients follows.

Contract modifications

Modifications to debt and receivables may be treated as continuations of existing contracts by prospectively adjusting the effective interest rate. A similar approach is permitted for leases with no reassessments of the lease classification and discount rate, or remeasurements of lease payments. Reassessment of whether embedded derivatives are clearly and closely related to the contract may not be required.

Hedge accounting

An entity may continue hedge accounting when certain critical terms of a hedging relationship change, performing some effectiveness assessments in ways that disregard certain potential sources of ineffectiveness. Specific guidance is provided for cash flow and fair value hedges.

HTM securities

A one-time sale and/or transfer to available-for-sale or trading may be made for those HTM debt securities that reference an eligible reference rate and were classified as HTM before 01 January 2020.