FASB adds new interest rate for hedge accounting

FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut
FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut

Accounting Standards Update 2018-16 from the Financial Accounting Standards Board adds the Overnight Index Swap rate based on “a broad Treasury repurchase agreement financing rate referred to as the Secured Overnight Financing Rate” to the list of benchmark rates allowed for hedge accounting.

The new rate was introduced as the result of an effort begun by the Federal Reserve Board and the Federal Reserve Bank of New York to find an alternative to the London Interbank Offered Rate, or LIBOR, swap rate, due to concerns about the latter’s sustainability.

Its introduction is expected “to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes,” according to FASB.

The eligible benchmark interest rates under Topic 815, “Derivatives and Hedging,” are:

  • Interest rates on direct Treasury obligations of the U.S. government, or UST;
  • The LIBOR swap rate;
  • The Securities Industry and Financial Markets Association Municipal Swap Rate; and now,
  • The SOFR OIS rate based on the Fed Funds Effective Rate.

Topic 815 covers risks associated with financial assets or liabilities that may be hedged, including interest rate risk associated with changes in the “fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to the designated benchmark interest rate.”

The amendments in the ASU will be effective concurrently with ASU 2017-12, which introduced the SIFMA rate as an eligible benchmark rate. For public companies that have adopted ASU 2017-12, they will be effective Dec. 15, 2018; for everyone else, they will be effective for fiscal years beginning after Dec. 15, 2019.
Early adoption is permitted for companies that have already adopted ASU 2017-12.

The ASU, including more information about effective dates, is available at www.fasb.org.

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