FASB has issued a proposed Accounting Standards Update (ASU) that would extend the period of time preparers can utilize the reference rate reform relief guidance and expand the Secured Overnight Financing Rate (SOFR)-based interest rates available as benchmark interest rates. Stakeholders are encouraged to review and provide feedback on the proposed ASU by June 6, 2022.
Issue 1: Proposed Sunset Date Deferral
In 2020, the Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.
The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the amendments in the proposed ASU would defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities would no longer be permitted to apply the relief in Topic 848.
Issue 2: Proposed Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate
In 2018, the Board issued Accounting Standards Update No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which added the term Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate (SOFR Swap Rate) to the Master Glossary of the FASB Accounting Standards Codification®. The amendments in Update 2018-16 also permitted a rate that meets the definition of the SOFR Swap Rate to be considered a benchmark interest rate and therefore eligible to be designated as the hedged risk for recognized fixed-rate financial instruments or a forecasted issuance or purchase of fixed-rate financial instruments.
In Update 2018-16, the Board stated that the definition of the SOFR Swap Rate was specific to the OIS rate based on SOFR and that it would monitor the developments of the forward-looking, term-based version of the SOFR rate (SOFR term) and consider including SOFR term as a benchmark interest rate in the future. Based on the developments of SOFR term in the marketplace, the proposed ASU would amend the definition of the SOFR Swap Rate to include other versions of SOFR, such as SOFR term, as a benchmark interest rate under Topic 815.