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On March 12, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.
Interest rate benchmarks play an important role in financial markets. The post-crisis declines in liquidity in interbank unsecured funding markets and cases of attempted market manipulations undermined confidence in the reliability and robustness of some existing benchmarks. Many interbank offer rates (IBORs) are expected to be replaced by new reference rate(s). The biggest issues presented by the replacement of IBORs are the potential effect on accounting for contract modifications and hedge accounting.
The amendments in this ASU provide elective expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
The following optional expedient are permitted for modified contracts, and must be applied consistently for all eligible contracts or eligible transactions:
The amendments allow an entity to continue hedge accounting without de-designation upon the following changes:
The amendments allow a change in the systematic and rational method used to recognize the excluded components into earnings and adjust the fair value of the excluded component through earnings.
Fair Value Hedges
The amendments provide the following optional expedients for fair value hedging relationships for which the derivative designated as the hedging instrument is affected by reference rate reform:
Cash Flow Hedges
The amendments provide the following optional expedients for cash flow hedging relationships affected by reference rate reform:
Debt Securities Classified as Held to Maturity
The amendments permit a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.
The ASU is effective for all entities as of the date of issuance of this ASU through December 31, 2022. The amendments must be applied prospectively.
To access the full script of ASU No. 2020-04, click here.
For more information on the financial reporting library, contact a local MNP Assurance Professional, or Jody MacKenzie, Director, Assurance Professional Standards.
This communication contains a general overview of the topic and is current as of July 24, 2020. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person’s use of or reliance upon this material. © MNP LLP 2020. All rights reserved.
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