Handbook: Reference rate reform

Our updated guide explains the optional expedients in ASC 848 that permit an entity to not apply otherwise applicable US GAAP to contracts or transactions that are modified or otherwise affected due to reference rate reform. This May 2023 edition reflects ASC 848’s revised sunset date (ASU 2022-06) and provides new interpretive guidance for discontinued hedges.

Applicability

• ASC 848

All companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued (e.g. LIBOR)

Key impacts

LIBOR is a reference rate used in a wide variety of contracts, including loans, leases, investments, deposits and derivatives. Certain LIBOR settings are no longer published, and the major USD LIBOR settings are expected to cease after June 30, 2023.

The array of affected contracts and transactions has led many companies to commit significant resources to transitioning contracts away from LIBOR in preparation for its eventual discontinuation. On top of managing the economic, operational and legal ramifications of the transition, companies also must determine the appropriate accounting for their transition activities.

To mitigate some of the accounting burden, the FASB issued ASC 848 (reference rate reform) – unique because it is dedicated to providing relief from otherwise applicable US GAAP requirements via optional expedients. Further, the guidance in ASC 848 is temporary in nature and sunsets on December 31, 2024.

Although ASC 848 provides significant relief, that relief has boundaries. Many of the optional expedients do not eliminate existing accounting requirements but instead permit entities to apply different – and generally less burdensome – analyses. In addition, each expedient has qualifying criteria that must be met.

Report contents

• Scope of Topic 848
• Contract modifications
• Hedging relationships: Changes to critical terms
• Fair value hedges
• Cash flow hedges
• Sale and/or transfer of HTM debt securities
• Effective date, transition and termination

Related content